Cryptocurrencies and taxes - Update 2024

Despite the fact that the volatility of the crypto market is causing uncertainty among private investors and experts disagree on the future development of the prices of various cryptocurrencies, rising prices can currently be interpreted as an indication of the renewed growth in interest in cryptocurrencies.

In step with the price explosions of many cryptocurrencies, many new blockchain-based projects and applications have emerged in recent years. Decentralized financial services (DeFi for short) and the digital representation of assets using so-called NFT tokens have enjoyed great popularity for a long time. In March 2021, for example, the auction house Cristie's auctioned the digital work "Everydays: The First 5000 Days" by the artist Beeple as an NFT for a record sum of more than USD 69 million.

In order to take account of the rapid developments in the field of cryptocurrencies, the FTA published a working paper on the tax treatment of cryptocurrencies and ICOs for the first time on August 27, 2019. Since then, revised versions have been published on an ongoing basis. In this context, the working paper on cryptocurrencies published by the FTA in October 2023 provides the latest information on the tax treatment of cryptocurrencies and offers additional guidance with regard to NFTs, among other things.

Below we provide an overview of the status of the treatment of cryptocurrencies in the tax environment.

How does a "blockchain" work?

Transactions are the most important component of a blockchain. This often involves the transfer of assets. A (payment) token transaction is simplified as follows:

Assume Alice (Owner 1) has 5 payment tokens and wants to send them to Bob (Owner 2). To do this, she must enter Bob's recipient address (comparable to an IBAN number) in her wallet and then press send. This creates a transaction message or payment order in the network for the transfer of 5 tokens with an input and an output. The input references Alice's credit, is digitally signed and credited to Bob's recipient address. As soon as Bob has gained access to his recipient address using his key pair (private and public key) and a wallet, he can dispose of the received tokens.

If Bob now wants to buy a coffee from Charlie (Owner 3) for 3 tokens, he has to enter Charlie's recipient address in his wallet and press send. This in turn creates a transaction message consisting of one input and two outputs. The first output contains the number 3 and Charlie's recipient address. The second output contains the number 2 and Bob's own public key. He therefore transfers 2 of the transferred 5 tokens to himself. Similarly, there is a transaction with two inputs and one output if Charlie has received 2 and 3 tokens from different sources and now wants to transfer 5 to Dave.

Put simply, token transactions are therefore nothing more than the referencing of an unused credit balance, combined with its allocation to a new recipient. The recipient in turn references the amount allocated to them as unused credit and can dispose of it, creating a kind of family tree of tokens.

The data structure that forms a reliable decentralized archive of all past transactions is called a blockchain. As the name suggests, the blockchain is a chain of transaction blocks. This is realized through a decentralized peer-to-peer network. In order for transaction blocks to be linked, the new block always refers to the identification number (hash value) of the previous block, which ensures a forgery-resistant method of register management.

As anyone can participate in the creation and chaining of new blocks in an open decentralized network, a consensus protocol is required to coordinate the creation of blocks and prevent contradictory register management. From a technical point of view, new blocks can be created much faster in a decentralized network than the network can agree on an unambiguous state of the credit distribution. Accordingly, the consensus protocol ensures that the creation of blocks is artificially limited so that the network can agree on an unambiguous state of the credit distribution at any given time.

The following consensus mechanisms have been established to date: Proof-of-Work (PoW) and Proof-of-Stake (PoS). With the PoW consensus mechanism, so-called miners can only link a created block to the blockchain if they provide proof of work in the form of computing power. In the case of Bitcoin, for example, the consensus protocol is defined in such a way that the entire network produces a new block every ten minutes on average. For each validly created block, the miners receive a so-called block reward (currently 6.25 Bitcoin per block for Bitcoin). In addition to the block rewards, the miners also receive a share of the transaction fees contained in the block created.

In the PoS consensus mechanism, validators can only link a created block to the blockchain if they provide proof of stake in the form of wealth (the "stake"). Proof of stake is provided by the validators by holding and depositing tokens in a wallet. In principle, any owner of a token is eligible to validate or create a block. The selection is made by an algorithm that takes into account influencing factors such as the age of the coins, the number of coins and randomness. However, the selection is influenced by the number of tokens provided: the more tokens on a wallet, the higher the probability of being selected as a validator for the creation of a block. As soon as validation is complete, the validator receives a staking reward for providing the tokens. This staking reward varies depending on the blockchain. For example, the staking reward on Ethereum 2 is currently around five percent per year.

For more information on staking and the associated tax implications, see our blog post from January 27, 2022 (Taxation of staking, lending and liquidity mining income).

Token system

In its working paper on cryptocurrencies and ICOs dated August 27, 2019, the FTA - based on the FINMA guidelines of February 16, 2018 - makes a functional distinction between payment tokens, investment tokens and utility tokens:

- Payment tokens: Tokens that are accepted as a means of payment for the purchase of goods or services or are used to transfer money and value are assigned to the payment token category. Most cryptocurrencies are payment tokens. These cryptocurrencies do not convey any claims against issuers. The most prominent payment tokens are Bitcoin (BTC), Ethereum (ETH), Ripple (XRP) and Cardano (ADA). Their value is determined solely by the interplay of supply and demand;

- Usage token: Tokens that are intended to provide access to a digital use or service that is provided on or using a blockchain infrastructure are assigned to the usage token category. The best-known example of a usage token is the Filecoin (FIL). Filecoins can be used to purchase decentralized data storage capacity in the form of a cloud storage service, such as Amazon Web Services or Cloudflare. Overall, however, usage tokens are more of a marginal phenomenon;

- Investment tokens: The category of investment tokens includes tokens that represent assets. In particular, such tokens can represent a debt claim against the issuer or a membership right in the sense of company law. As of today, investment tokens can be divided into the following three sub-categories:

o Debt capital token

o Investment token with contractual basis

o Investment token with participation rights

However, there are also hybrid token that have characteristics of several of the categories listed above. Such hybrid forms reveal weaknesses and ambiguities in the Finma model. In addition, the Finma Model does not distinguish between relative and absolute rights in the case of asset token (specifically: whether a claim or, for example, property is transferred).

Despite the fact that a distinction is typically made between the three types of tokens mentioned above, NFTs do not fall into any of the corresponding categories, which highlights the need for explicit tax clarification for these tokens. NFTs represent unique, non-exchangeable, indivisible and irreplaceable assets such as art, music or media. In this context, an NFT token can be seen as an irrevocable digital certificate of ownership and authenticity for a selected asset, regardless of whether the latter is digitally or physically available.

Fiscal treatment of cryptocurrencies

Each token conveys very different legal rights depending on its function. In order to determine the tax implications, each token must therefore be considered and assessed individually.

In the following, however, we will focus on the tax treatment of payment tokens such as Bitcoin, Ether, Cardano, etc. We then turn our attention to the group of NFTs, on whose tax treatment the FTA has provided specific guidelines for the first time in its most recently published working paper.

For private individuals

Variant 1: Buying and selling payment token

Wealth tax

The general rule is that payment tokens meet the definition of tangible assets under civil law and therefore qualify as taxable assets and must be recorded as such in the tax return. The Canton of Zurich, the Canton of Zug and the Canton of Lucerne agree on the tax treatment of payment tokens for natural persons. Assets in cryptocurrencies are subject to wealth tax and must be declared in the list of securities and assets under "other assets". For this purpose, a printout of the wallet as at the end of the tax period should be enclosed.

Since 31.12.2015, the FTA has determined a value for certain payment tokens that is relevant for wealth tax by calculating the average of various prices at the end of each year and publishing the calculated year-end tax rate in the "Exchange rate lists for foreign exchange - banknotes" relating to direct federal tax. The FTA's exchange rate list serves as a recommendation for the cantonal tax authorities making the assessment, but is accepted and applied by the cantons in practice without exception. The FTA's year-end tax rates are based on the average of various stock exchanges. In order to take account of the sometimes considerable daily price differences, the highest and lowest prices are not included in the calculation.

Cryptocurrencies for which the FTA has not set a year-end tax rate must be valued differently depending on the canton. In the canton of Zurich, for example, they are to be declared at the year-end price of the most common exchange platform for this currency. In the canton of Lucerne, the market value as at December 31 or the end of the tax liability is decisive for their valuation. The year-end rate according to the trading platform used must be used.

Income tax

Buying and selling payment tokens generally does not result in taxable income for natural persons, as capital gains from the sale of private assets are known to be tax-free and capital losses are irrelevant for tax purposes. However, if the investor's activity goes beyond purely private asset management and thus constitutes self-employment, the capital gains made are taxable, the losses are tax-deductible and price fluctuations must be recorded in the accounts in accordance with the principles of commercial law.

The distinction between tax-exempt private asset management and taxable commercial trading of payment tokens is therefore of great importance. According to the Confederation and the cantons, the distinction is made analogously on the basis of KS No. 36 of the FTA regarding commercial securities trading. For details on the distinction, see our blog post from January 27, 2022 (From crypto trader to securities trader?).

Variant 2: Staking, lending and liquidity mining

Wealth tax

Payment tokens that are staked, lent or made available as part of liquidity mining are also taxable assets. Accordingly, they must be recorded in the tax return in the list of securities and assets. The valuation of payment tokens that have been staked, lent or made available in the context of liquidity mining is the same as for variant 1: they must generally be valued at the year-end tax rate in accordance with the FTA price list. If no year-end tax rate has been published for the corresponding payment token, the token must be valued at market value or investment value, depending on the canton.

Income tax

The Confederation and cantons have not commented on the tax qualification of income from staking, lending and liquidity mining for a long time. In December 2021, the FTA publicly stated for the first time that decentralized investment income should be qualified as interest from credit balances and taxed accordingly as taxable income. This confirms the practice already in place in the cantons. You can find more information on the tax qualification of income from staking, lending and liquidity mining in our blog post from January 27, 2022 (Taxation of staking, lending and liquidity mining income).

As the FTA states in the publication on cryptocurrencies published in October 2023, the general rules on determining the value on the reporting date and determining any foreign currency exchange rate apply to the declaration of values in the context of Individual Income Tax . In principle, income from staking, lending and liquidity mining must therefore be valued at the time of inflow, in the same way as foreign currencies, although the cantons also accept valuations at the monthly or annual average rate. You can find more information on the tax valuation of income from staking, lending and liquidity mining in our blog post from January 27, 2022 (Taxation of staking, lending and liquidity mining income).

Software solutions such as Koinly have established themselves in practice for the income tax recording of income from staking, lending and liquidity mining. All blockchain wallets and trades can be connected to the Koinly software and combined in a tax report.

Finally, when operating staking, lending and liquidity mining, you should always bear in mind the latent risk of a possible reclassification as self-employment. You can find more information on the tax risks and consequences of a possible reclassification in our blog post from January 27, 2022 (From crypto trader to securities trader?).

Special case: NFTs

In the current working paper on cryptocurrencies, the FTA has recently issued guidance on the tax treatment of NFTs. In general, the FTA considers the purchase and sale of NFTs to be the same as transactions involving the trading of assets represented by ordinary tokens.

Income tax

In this context, the acquisition of NFTs is not a relevant event for income tax purposes and any transaction costs are not tax deductible. Similarly, the sale of NFTs and any potential gains or losses arising therefrom are generally not relevant for income tax purposes.

However, the FTA provides for an exception in the following cases:

- If individuals qualify as self-employed, any profit made on the sale of NFTs is subject to income tax, although any losses are tax deductible.

- All license income earned by a Swiss-based creator of an NFT is subject to income tax.

- Due to the fact that miscellaneous can be represented virtually by tokens and NFTs, NFTs are still assessed on a case-by-case basis.

Wealth tax

In general, it can be assumed that NFTs, like other tokens, are subject to wealth tax at their market value at the level of the NFT holder resident in Switzerland.

Based on a holistic assessment, the defined guidelines enable a consistent tax treatment of NFTs. However, given the ongoing development of NFTs, a case-by-case assessment of their tax treatment and valuation for wealth tax purposes remains essential.

For companies

In the case of companies, how cryptocurrencies are accounted for is important for tax purposes due to the authoritative principle. There are no official rules on this for the Swiss Code of Obligations. There are basically four options: Recognition as cash, as securities, as inventories or as intangible assets.

Most experts in Switzerland reject the recognition of payment tokens as cash, as payment tokens are not legal tender or foreign currencies. In its position paper dated April 30, 2019, ExpertSuisse states that payment tokens do qualify as securities and can be valued either at cost or at observable market prices. If a company's operating activities are mainly geared towards trading payment tokens, e.g. as part of a brokerage activity, classification as inventories may well be appropriate. It can also be assumed that payment tokens can also be recognized as intangible assets if the criteria of identifiability, non-monetary value and lack of physical substance are met in the case of long-term holding.

Final remark

The Swiss tax authorities are endeavoring to take account of the rapid development of cryptocurrencies and are trying to create as much legal certainty as possible for taxable persons.

Nevertheless, there are still some unanswered questions, especially in connection with decentralized financial services. Especially since the current FTA working paper also provides initial guidelines on the tax classification of NFTs and thus offers some guidance, it should be noted that many NFT tokens are subject to dynamic development and therefore need to be updated. Many questions also remain unanswered for companies that hold cryptocurrencies.

If in doubt, it is best to obtain information from the tax authorities in person or consult a tax advisor.

Politicians have also realized that there is a need for action: The amendments to the Code of Obligations, the Intermediated Securities Act and the Federal Act on Private International Law adopted as part of the DLT bill came into force on February 1, 2021. The provisions enable the introduction of so-called registered securities (Art. 973d ff. nOR) and position Switzerland as an attractive location in the field of new technologies.

The advantage of issuing securities via a DLT-based infrastructure as registered securities is primarily that the shareholder can hold his digital shares directly himself and transaction costs are reduced. The other provisions of the DLT bill have entered into force as of 1 August 2021.

As confusing and unregulated as all this may sound, in the end it is classic tax issues (what has to be recorded for tax purposes and how) that are merely being raised anew in the context of the crypto-monnaie debate.