Cryptocurrencies and taxes

Cryptocurrencies are digital means of payment that are created and transferred using principles of cryptography. At the center of cryptocurrencies are the so-called "miners", who can be private individuals or companies. They provide their computers with computing power and continuously check all transactions of the respective crypto-monnaie for their validity. The transactions are stored in a kind of public and digital cash book. The personal details of the owners are not visible in this public cash book, only their anonymized account numbers. Only when the majority of the "miners" agree after verification that there is sufficient credit in the sender's account for a transaction is it approved and stored in the so-called "blockchain".

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And what is a "Blockchain"?

The "blockchain" is the technology behind the crypto-monnaie, which controls and coordinates the actions of the "miners". In simple terms, the "miners" must continuously solve computational tasks using their computing power. When a calculation task has been solved, the transactions of a crypto-monnaie 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 in an unchangeable and irreversible manner for everyone. This process is constantly repeated, resulting in an ever-longer chain of encrypted blocks, which is intended to prevent anyone from cracking the system. The "miner" who has solved a calculation task in each case receives monetary compensation in return in the form of the respective crypto-monnaie, which increases the total amount of crypto-monnaie , equivalent to 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 come into being and how do you launch a new crypto-monnaie in the first place?

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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 from 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.
• Usage tokens provide access to a digital service or usage that is provided on or using a blockchain infrastructure.
• Investment tokens represent assets, be it a debt claim or a membership right, for example. The investment token therefore has an economic function like a share or a bond.

But there are also hybrid tokens, which have characteristics of several of the categories listed above.

Fiscal treatment of cryptocurrencies

Each token conveys very different legal rights depending on its function, and to determine the tax implications, each token must therefore be considered and assessed individually. Stamp duties should generally not be an issue with cryptocurrencies. If a token conveys a right to a future service or delivery of a product, VAT would be a consideration. In turn, if a token makes periodic payment to the holder, WHT could apply. In the following, however, we focus on the tax 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 natural persons. Credit balances in cryptocurrencies are subject to wealth tax and must be declared under "other credit balances" in the securities and credit balances register. For this purpose, a printout of the "wallet" with the status at the end of the tax period should be enclosed. The pure crypto-monnaie is thus treated by the tax authorities like a foreign currency 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 are to be declared in the Canton of Zurich at the year-end rate of the most common 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-exempt and capital losses are irrelevant for tax purposes. If one receives salary payments or remuneration in the form of cryptocurrencies as an employed or self-employed person, this is taxable earned income. The mining of cryptocurrencies also leads to taxable income. It is also important to keep in mind the practice on professional securities trading, because if you qualify as a professional trader of cryptocurrencies, the cryptocurrencies are part of your business assets. In this case, the profits from trading in cryptocurrencies are taxable, the losses are tax deductible and price fluctuations must be recorded in the accounts in accordance with commercial law principles.

For companies

For companies, it is important how cryptocurrencies are accounted for because of the principle of materiality for tax treatment. There are currently no official rules on this. Neither the Swiss Code of Obligations, the Swiss GAAP FER, nor the American (US GAAP) or the International Financial Reporting Standards (IFRS) have yet specified this issue. Basically, there are four possibilities: Accounting as cash, as marketable securities, as inventories or as intangible assets. Most experts reject accounting for pure cryptocurrencies as cash and prefer accounting for them as marketable securities, provided that a company does not use the crypto-monnaie in the ordinary course of business. If a company trades a crypto-monnaie as a significant operating activity, then it is conceivable to book it under inventories. According to international standards, however, the accounting of pure cryptocurrencies as intangible assets is to be preferred.

Final remark

Most cantons have now expressed and clarified their views on the tax treatment of pure cryptocurrencies owned by natural persons. Nevertheless, there are still some open questions, especially concerning companies that hold cryptoccurrencies and for cryptocurrencies that do not only have a payment function. In case of doubt, it is best to contact tax authorities in person or to consult a tax advisor.

Politicians have also noticed that there is a need for action: on 18 January 2018, the State Secretariat for International Financial Matters (SIF) set up a working group on blockchain/ICO. Based on the work of this working group, the Federal Council instructed the Federal Department of Finance (FDF), in cooperation with the Federal Department of Justice and Police (FDJP), to draw up selective amendments to Swiss law to improve the framework conditions for blockchain. The consultation on these legislative amendments was opened on 22 March 2019 and will run until the end of June 2019. It therefore remains to be seen what further decisions will be made by politicians and the authorities.

As unregulated and confusing as all this may sound, in the end these are classic tax issues that simply arise anew in the context of the crypto-monnaie debate.

FTA working paper on cryptocurrencies and ICOs/ITOs of 27 August 2019

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