From crypto trader to securities trader?

As is generally known, capital gains from the sale of private assets are tax-exempt. On the other hand, capital gains from the sale of business assets - in the case of self-employment - are subject to income tax, whereby the losses incurred and booked on business assets can be deducted from taxable income.

At the end of 2017, the cantons - first and foremost the cantons of Zug and Lucerne - issued their first statements on the tax treatment of cryptocurrencies, stating that the demarcation between simple private asset management and commercial trading in cryptocurrencies is based on the FTA's CS No. 36. In December 2021, the FTA publicly confirmed for the first time the analogous application of CS No. 36 to trading in cryptocurrencies.

The decisive question is therefore which indications speak for professional trading in cryptocurrencies and how high the probability normally is as a crypto trader to be qualified by the tax authorities as a professional securities trader.

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Preliminary examination

In order to ensure adequate legal certainty for the majority of taxpayers, so-called "safe haven rules" were drawn up for the application of the law in the FTA's CS No. 36, on the basis of which private asset management can be assumed in every case within the scope of a preliminary examination (No. 3). These criteria must be fulfilled cumulatively:

• The holding period of the securities sold is at least 6 months.
• The total transaction volume (corresponds to the sum of all purchase prices and sales proceeds) per calendar year does not exceed five times the securities and credit balance at the beginning of the tax period.
• The realisation of capital gains from securities transactions does not constitute a necessity to replace missing or lost income for living expenses. This is usually the case if the realised capital gains amount to less than 50% of the net income in the tax period.
• The investments are not debt-financed or the taxable investment income from the securities (such as interest, dividends, etc.) is greater than the proportionate debt interest.
• The purchase and sale of derivatives (especially options) is limited to hedging own securities positions.
  

A cumulative fulfillment of the "Safe Haven Rules" in connection with the trading of cryptocurrencies seems difficult at first glance. For example, the criterion of a minimum holding period of six months is regularly not met when trading cryptocurrencies, as price fluctuations of 10-20 percent per day are not uncommon and the tokens are therefore often not held for at least 6 months. In addition, many private investors have only a very short-term investment horizon vis-à-vis cryptocurrencies and hope for quick profits. Also, the criterion of the transaction volume will not be given as a rule, since cryptocurrencies can rise very sharply in price during a calendar year, as experience shows, and if a fraction of the cryptocurrency holdings is subsequently sold, the transaction volume can relatively quickly amount to more than five times the cryptocurrency holdings at the beginning of the tax period. In addition, the transaction volume also raises the question of how to assess transactions that are made solely for the purpose of acquiring another crypto-monnaie and, in the absence of a fiat money exchange pair, must be made via another crypto-monnaie such as Bitcoin or Ethereum. With regard to the criterion of debt financing, it should also be noted that crypto tokens are increasingly being acquired with leverage, which probably also tends to argue against the application of the "safe haven rules".

As an interim conclusion, it can thus be stated that the preliminary examination will not create legal certainty for taxpayers in many cases and that a professional activity can only be excluded a priori in exceptional cases. Consequently, in a second step, it must be examined on the basis of further Federal Court criteria whether a self-employed activity exists.

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Commercial trading in cryptocurrencies

According to the established practice of the Federal Supreme Court, a business is always considered to be commercial if purchases and sales of assets are made in a manner that goes beyond simple private asset management. Within the framework of its Jurisprudence , the Federal Supreme Court has elaborated various criteria for the assessment of professionalism, whereby the entire circumstances of the individual case must always be taken into account. According to previous practice, the following are indications of a commercial activity:

Systematic or planned manner of proceeding, frequency of transactions, short period of ownership, close connection with the taxpayer's professional activity, use of special expertise or substantial external funds to finance the transactions, use of the profits obtained or their reinvestment in similar assets.

In its decision of 23 October 2009 (2C_868/2008), the Federal Supreme Court held that the criteria of a "systematic and planned approach" and the "use of special expertise" no longer proved to be contemporary from today's perspective and are only of secondary importance for the assessment of professionalism.

Thus, the distinction between (tax-exempt) private asset management and (taxable) commercial trading in cryptocurrencies - based on the practice of the Federal Supreme Court - is to be made primarily on the basis of the following criteria:

• Frequency of transactions and short duration of ownership: According to KS No. 36 of the FTA, the frequency of transactions and the short duration of ownership are indications that the taxpayer is not aiming for at least a medium-term capital investment, but is dependent on a quick realisation of a capital gain and also accepts that significant losses could arise.
• Use of substantial funds to finance the business: The use of substantial borrowed funds in private asset management is rather atypical. Normally, in the ordinary investment of private wealth, care is taken to ensure that income exceeds expenses. However, if there is external financing, the taxpayer bears an increased risk, which is an indication of commercial activity.
• Use of derivatives: Trading in derivatives may serve the purpose of hedging. However, if the use of derivatives exceeds the hedging of risks and a large volume is traded in relation to the total assets, trading in derivatives is to be qualified as speculative, which indicates a professional approach.

According to the Federal Supreme Court, the existence of a single criterion is sufficient to qualify as a commercial activity. For trading in cryptocurrencies, the criterion of "frequency of transactions and short duration of ownership" is currently still in the foreground. Due to the still young market, investors are forced to manage their private portfolio very actively. The fact that many new types of tokens cannot be purchased for fiat money also increases the number of transactions and thus the risk of being qualified as a professional cryptocurrency trader. Derivatives trading related to cryptocurrencies has not (yet) reached the mainstream, with Bitcoin and Ether futures already being offered on the Chicago Mercantile Exchange (CME).

Conclusion

Trading in cryptocurrencies on online trading platforms entails great uncertainties and risks from a tax perspective. As already mentioned, no legal certainty can be created for taxpayers within the scope of a preliminary examination (No. 3 of the FTA's KS No. 36). The criterion of a holding period of at least 6 months will regularly not be met, as the cryptocurrency market is extremely volatile and private investors hope for very short-term profits. The criterion of the transaction volume is also connected to this. Here too, in the event of very sharp price increases within a year, it may well be that more than five times the cryptocurrency holdings are traded at the beginning of the tax period. Missing exchange pairs on the online platforms additionally increase the transaction volume and thus the risk of being qualified as a professional cryptocurrency trader.

Even the criteria created by the Federal Supreme Court for professional securities trading, which also apply mutatis mutandis to trading in cryptocurrencies, can hardly create legal certainty. Due to the nervous markets, the portfolios must be actively managed, which inevitably involves many transactions and a short period of ownership.

However, the practice regarding securities trading shows that the cantons are very reluctant to apply these regulations. The same currently applies to trading in cryptocurrencies. The cantons of central Switzerland, the canton of Zurich and the canton of Aargau are currently very cautious in applying the criteria of the FTA's KS No. 36, whereby the entire circumstances of the individual case must always be taken into account. Nevertheless, the first cases of professional cryptocurrency trading already exist in these cantons. It should also be noted that some cantons have their own regulations for state and municipal taxes in connection with securities trading, which would also be desirable for trading in cryptocurrencies.

If one qualifies as a professional cryptocurrency trader, all capital gains realised in the tax year are subject to tax and contributions at the federal, cantonal and communal level as well as to the AHV. The taxable capital gain from the sale of cryptocurrencies is determined from the difference between the sale proceeds and the cost price, whereby the taxpayer must prove the amount of the cost price. Pure price fluctuations are not taxed. Losses would be deductible if they can be proven. In addition, it cannot be ruled out that other securities income (interest and dividends) of the taxpayer could also be "infected" by crypto trading and subject to the AHV tax liability of around 10%.

Every situation is unique and requires a very individual risk analysis. We would therefore be happy to explain your risks of professional securities trading in connection with cryptocurrencies in a personal discussion.