Cryptocurrencies such as bitcoin, etherum or ripple are currently extremely fashionable and widely talked about. How these cryptocurrencies work can be rather difficult to understand, not to mention the tax implications of owning and using these new trend currencies.
Cryptocurrencies are digital means of payment that are created and transferred using cryptographic principles. The so-called «miners», which can be private individuals or companies, are at the centre of the cryptocurrencies. They provide their computers and the correspondent computing power to continuously check all transactions of the respective cryptocurrency for their validity. The transactions are stored in a kind of public and digital cash ledger. The personal details of the owners are not shown in this public ledger, only their anonymised account numbers. Only when the majority of the «miners» agree that there is sufficient credit on the sender's account for a transaction will it be approved and recorded in the so-called «blockchain».
What is a «blockchain»?
The «blockchain» is the technology behind the cryptocurrency, which controls and coordinates the actions of the «miners». To put it simply, the «miners» must continuously solve computing tasks with the help of their processing power. When a computing task has been completed, the transactions of a cryptocurrency that have not yet been stored in a block are combined into a new block and encrypted. In this way, the transactions contained in the block are stored invariably and irreversibly for all. This process repeats itself constantly, so that an ever longer chain of encrypted blocks is created, which should prevent anyone from cracking the system. The «miner» who has solved a computing task receives a monetary remuneration in the form of the respective cryptocurrency, which increases the overall volume of the cryptocurrency, equivalent with the printing of banknotes by a central bank.
This decentralized control system by «miners» all over the world turns cryptocurrencies into a secure means of payment in which a central bank or intermediaries such as commercial banks are superfluous. When you buy cryptocurrencies on online platforms, they are stored in a digital wallet where you can view the available sum of cryptocurrencies and make payments at any time.
But how did all these cryptocurrencies suddenly emerge and how do you bring a new cryptocurrency onto the «market» in the first place?
Initial Coin Offering
The starting point of a new cryptocurrency is an «Initial Coin Offering» (ICO). An ICO is a sort of crowdfunding for cryptocurrency companies. Interested investors transfer funds to the organisers of the ICO. In return, they receive a so-called «coin» or «token», which is a unit of a cryptocurrency, for example a bitcoin. This enables cryptocurrency companies to finance their future projects. These «coins» or «tokens» can have different functions depending on the project and idea of the organisers. In its guideline of
16 February 2018, the FINMA distinguishes three different functions of «tokens»:
- Currency tokens or so-called «pure cryptocurrencies» are accepted as means of payment for the purchase of goods or services and serve to transfer money and values. For example, bitcoins are among the payment tokens.
- Utility tokens provide access to a digital usage or service provided on or using a blockchain infrastructure.
- Tokenised securities represent assets, be it a debt claim or a membership right, for example. Tokenised securities thus have an economic function such as a share or a bond.
However, there are also hybrid tokens that have characteristics from several of the categories listed above.
Fiscal treatment of cryptocurrencies
Each token conveys very different legal claims depending on its function and in order to determine the tax implications, each token must therefore be considered and evaluated individually. As a rule, stamp duties shouldn't be an issue for cryptocurrencies. If a token conveys a right to a future service or delivery of a product, VAT could be considered. If a token makes periodic payments to the holder, the withholding tax may be due. In the following, however, we will focus on the fiscal treatment of pure cryptocurrencies such as bitcoin.
For private individuals
The Canton of Zurich, the Canton of Zug and the Canton of Lucerne agree on the tax treatment of pure cryptocurrencies for private individuals. Credit balances in cryptocurrencies are subject to wealth tax and must be declared in the list of securities and credit balances under "other credit balances". For this purpose, a printout of the «wallet» as at the end of the tax period is to be enclosed. The pure cryptocurrency is thus treated as a foreign currency by the tax authorities and the FTA announces a year-end tax rate for bitcoins and certain other cryptocurrencies. Cryptocurrencies for which the FTA has not set a year-end tax rate must be declared in the Canton of Zurich at the year-end rate of the most common stock exchange platform for this currency. In the Canton of Lucerne, however, these cryptocurrencies are to be declared at the purchase price. Capital gains from movable private assets are generally tax-free and capital losses are irrelevant for tax purposes. If you are employed or self-employed and receive salary payments or remuneration in the form of cryptocurrencies, this is taxable earned income. Mining cryptocurrencies also leads to taxable income. In addition, it is important to keep an eye on the practice of commercial securities trading, because
if you qualify as a commercial trader of cryptocurrencies, the cryptocurrencies are part of your business assets. Then gains from trading in cryptocurrencies are taxable, losses are tax-deductible and exchange rate fluctuations must be recorded in accounting in accordance with commercial law principles.
For companies, the way in which cryptocurrencies are accounted for is important for their fiscal treatment
because of the authoritative principle. There are no official guidelines regarding this at the moment. Neither
the Swiss Code of Obligations, the Swiss GAAP ARR, the American (US GAAP) nor international regulations (IFRS) have yet established a code of conduct in this matter. Basically, there are four possibilities: Accounting as cash, securities, inventories or intangible assets. Most experts reject the booking
of pure cryptocurrencies as cash and prefer a booking as securities, on the condition that a company does not use the cryptocurrency within the scope of ordinary business activities. If an enterprise engages in trading in a cryptocurrency as a significant operating activity, it may be recorded under inventories. According to international standards, however, the accounting of pure cryptocurrencies as intangible assets is to be preferred.
Most cantons have now expressed their views on the tax treatment of pure cryptocurrencies held by private individuals and have clarified these. However, there are still some open questions, especially for companies that hold cryptocurrencies and for cryptocurrencies that do not exclusively serve as a means of payment. If in doubt, it is best to obtain information personally from the tax authorities or to engage a tax consultant. Politicians have also noticed that action is needed: on 18 January 2018, the State Secretariat for International Financial Matters (SIF) set up a task force on Blockchain/ICO. Therefore, it remains to be seen what further decisions politicians and authorities will make. As confusing and unregulated as it all may sound, at the end of the day it is classic tax issues that simply arise anew in the context of the cryptocurrency debate.