The rise in the price of certain virtual currencies since the end of 2020 has been much in the news lately and attracted many investors. For example, in May, Dogecoin even recorded a one-off price increase of more than 24,000% over one year. The hype surrounding this currency, created in 2013 and presenting itself as a "joke", may be surprising. However, it is a perfect example of how important cryptocurrencies have become to the markets in recent years.
Now democratised and structured, they are available to any private investor. As a result, trading platforms and new forms of investment have emerged for non-professional investors. This phenomenon entails risks for these investors who do not have the reflexes relating to the obligations and tax impacts generated by these transactions. To understand the issues, it is essential to ask the following questions:
- How do I declare my cryptocurrencies in my annual tax return?
- Are there any specific tax risks?
- How do I regularise my situation if my cryptocurrencies were not declared?
We will review the key elements of cryptocurrency taxation and the tax risks associated with specific market actions.
How do I declare my cryptocurrencies in my annual tax return?
Cryptocurrencies, subject to the specific cases mentioned below, are an integral part of the investor's private wealth.
They must therefore be declared at the year-end market value in the tax return's securities statement and subject to wealth tax. The exchange rate at which they must be converted is not clearly defined. Unlike traditional currencies ("fiat currencies"), there are no globally uniform exchange rates for cryptocurrencies. The Federal Tax Administration (FTA) has been calculating a reference rate as at 31 December for the main cryptocurrencies (BTC, ETH, ADA, etc.) for some years now. Crypto-currencies not yet listed by the FTA (BNB, CHSB, CHZ, etc.) can be declared on the basis of their price on 31.12 published by a recognised exchange plateform. Finally, crypto-currencies for which it is impossible to determine a price must be declared at least at the acquisition price.
Remuneration generated in the form of crypto-currencies (yields/rewards, etc.) during the year, linked in principle to the deposit of crypto-currencies, must also be declared in the statement of securities and subject to income tax (even if they are blocked and have not been paid out). Indeed, these remunerations can be assimilated to securities returns or savings interest. These remunerations must, this time, be converted at the average exchange rate for the year. This is where the first difficulty arises. This is because trading or investment platforms are not always equipped to enable the taxpayer to determine the precise income he has generated. Gains or losses resulting from market transactions constitute, subject to the specific cases mentioned below, non-taxable capital gains or non-deductible capital losses for the private investor. Obviously, in the current upward trend, the search for capital gains is the central element. The fact that it can be tax-exempt makes it an even more attractive goal.
Are there any specific tax risks?
The search for capital gains can be problematic depending on the way in which they are sought. Indeed, a private investor carrying out a certain number of transactions (purchases and sales) on the market, especially in the short term, runs the risk of being qualified as a professional crypto-currency trader by the tax authorities by analogy with the terminology already known to the professional securities trader. While this terminology has not yet been officially used by the tax authorities in relation to crypto-currency trading, there is no doubt in our mind that it could easily be applied to this field as the similarities are so obvious. The criteria of volume, high frequency and short duration of ownership first of all, but also the question of the use of foreign funds to finance the investment are easily transposable, as are the other less important criteria (systematic and planned actions or the link with professional activity or prior knowledge).
It should be noted that in this context, the fact of selling a certain cryptocurrency in order to acquire another one constitutes the realisation of a gain for Swiss tax purposes. When it is exempt, it obviously goes unnoticed. However, in the context of qualifying as a crypto-currency professional, each intermediate capital gain realised will constitute income.
Beyond the issue of capital gain, there are now many forms of investments on the market that also offer a return. The first of these, which is now relatively well known, is mining (i.e. the provision of a computer infrastructure that participates in the blockchain). The remuneration generated by mining is fully taxable income and must be declared as such.
Then there is a plethora of products that combine mining, guarantee, investment in the form of masternodes, staking or lending. Each of these products has almost infinite variations and makes tax analysis relatively difficult. On top of that, the platforms that host these types of investments are not organised like banks, ready to provide their investors with financial documentation that meets the requirements of the tax authorities. Consequently, the question of how to distinguish the taxable return from the "simple" increase in the value of the currency (exempt in principle) is likely to be an interesting challenge for many investors.
How do I regularise my situation if my cryptocurrencies are not declared?
Many private investors have not declared their cryptocurrencies until now. The main reason for this is that many investors initially saw it as a game and invested small amounts. However, considering the considerable upward trend of the market in the long term, the potential capital gains that can be realised by these investors can become colossal when converting into traditional currencies ("fiat currencies"). The occasional investor or not, who will have realised an interesting capital gain and who will wish to recover his stake in Swiss francs, possibly in order to acquire a property, will not be able to explain the considerable increase in wealth observed by the tax authorities. In order to avoid the pitfalls of a painful procedure, the so-called spontaneous denunciation procedure should be considered by the investor. If the latter cannot avoid the tax catch-up and the late interest, he will at least escape without a fine and will have definitively regularised his situation.
The cryptocurrency craze has never been stronger and is now of interest to all types of investors including those who are not particularly well versed in the world of blockchain. At this stage, however, the tax laws remain those of the 20th century and it is indeed the old principles that remain applied by a somewhat clueless tax administration. However, it may be reasonable to think that the tax authorities will undoubtedly take an interest - provided that the trend is confirmed between now and 31 December of this year - in the significant gains made by certain taxpayers. The temptation to apply the professional trader criteria could therefore be very strong. Particular care should therefore be taken to avoid falling into this "trap".
Finally, we can only recommend to take great care to document as much as possible the exchanges made and to fully understand the functioning of the remuneration proposed by some cryptocurrency-backed investments. It is indeed a matter of being able to trace the income and thus fill in your tax return completely!
Article written by Deborah Joye, Quentin Eiselé and Hugo Visinand