Bitcoin is a decentralized payment system that can be used all over the world and is also the name of a digital monetary unit. The transfers of individual digital units are processed by the consortium of computers via the internet using a dedicated peer-to-peer application, thus eliminating the need for a central clearing ledger. This is a fundamental difference to the traditional banking system. A personal cryptocurrency wallet serves as a tool to access your own bitcoins. Cryptographic technology ensures that bitcoin transactions can only be carried out by the appropriate owner of the digital asset, and that monetary units cannot be spent more than once. Identification in the blockchain is based on the public key (from which the address type is derived). An associated with a public key is a private key, which gives its holder the power to dispose of the digital units associated with a given public address. The bitcoin network is based on a decentralized database, the bitcoin blockchain, managed jointly by all participants using bitcoin software, where all transactions taking place on the blockchain are recorded. Blockchain is understood as a database whose integrity (protection against any manipulation) is secured by storing information from the previous data record in the next data record. This ultimately forms the actual data block chain. This functionality resembles a digital accounting database. For this reason, the bitcoin system has been described as the "Internet of values". Blockchain technology enables users to reach agreement on the correct content of a database in a decentralized network.
New bitcoin units are gradually created through the so-called cryptocurrency mining. Bitcoin system participants can participate in the generation of new cryptocurrency units by using the computing power. Complicated calculations are used to confirm transactions and ensure the operation and security of the Bitcoin network. All participants compete for the amount that is given out to one of the participants approximately every ten minutes as well as for getting transaction fees. Initially, 50 bitcoins were paid out for each new block until November 2012, then the system was paying out 25 units until July 2016, and 12.5 bitcoins thereafter.
The exchange rate of Bitcoin to other traditional means of payment (so-called fiat money) is determined by a limited supply and a corresponding demand. The maximum number of units of this cryptocurrency that can be generated by the Bitcoin system is set at 21 million coins and is determined by the network protocol, which cannot be influenced by individual participants. In turn, each bitcoin unit is divisible and can be divided into up to one hundred millionths (0.00000001), which corresponds to the so-called satoshi.
According to current doctrine, digital data in Switzerland may, in principle, be the subject of contracts, e.g. a purchase contract (as the subject of purchase), an exchange contract, a donation or a license agreement. Digital data can be created, stored, transmitted and sold. They are therefore goods of reasonable commercial value. However, until now, academic discussion of digital data ownership has been limited to single units of digital information on a specific hard drive. However, contrary to this concept, the corresponding bitcoin-related information units do not exist on a single hard drive, but are duplicated on as many memory units as possible. The more convergent information can be found in various storage units around the world, the more secure the content and related transactions appear, and thus the economic assignment of bitcoin to a specific public address.
Bitcoin users should therefore be able to qualify as owners within the meaning of Art. 641 of the Swiss Civil Code. Such qualification requires a modern interpretation of the term "thing" (or a functionally equivalent interpretation due to the lack of physicality) and is based on the fact that the owner can exercise control over bitcoins through his public address and the associated private key. Moreover, bitcoins can be distinguished from each other by assigning them to a specific public address, which means that in this case all units are not accumulated together, as is the case with, for example, cash balances in a bank. Finally, this interpretation also reflects the expectations of everyone involved in the bitcoin transaction.
According to the author, bitcoin ownership should be understood as the property (or functional equivalence) of a unit of digital information that is unique, secure, transparent and directly transferable. Bitcoin is therefore neither a security, nor a credit balance, nor any other type of claim right, and its existence does not depend on the counterparty / user but on the computer system and the appropriate technology. The system maintains a decentralized trade repository that allows peer-to-peer transactions and does not require a third party such as a bank as a trustee or intermediary. The Bitcoin blockchain has a counting and allocation function whereby the owner of the bitcoins is identified by means of a public address and the associated power to dispose of the bitcoins stored on that address via a private key. The system does not grant the owner any additional rights beyond his actual claims. Like cash or gold, bitcoin also has no consumer value.
Given the above, bitcoin can therefore qualify as a limited supply type of digital gold with a public, decentralized and forgery-proof digital record of transactions.
a. Declaration in the tax return
Based on the civil law qualification as the ownership (or functional equivalence) of a digital unit of value, Bitcoin is a tax creditable monetary right and thus is part of the Swiss taxpayer's net assets according to Art. 1 StHG. However, by analogy with cash, smaller amounts that are used for normal payment transactions may be omitted from the declaration. However, this assumes that these bitcoins are actually used for the corresponding payments and are not kept solely as investment assets. Values exceeding this amount must be declared under net assets.
The question now is where to enter bitcoins on your tax return. There is a form requirement (example § 133 StG-ZH) and an obligation to submit all attachments. Theoretically, it can be assumed that the place in the tax declaration where bitcoins should be declared is the item "securities". First of all, in the above-mentioned list of securities, according to the provisions of Swiss law, only securities and credit balances with the relevant counterparty should be entered. On the other hand, monetary rights to cryptocurrency units should not be listed in the securities list, but under the "Other Assets" heading (e.g. jewelry, paintings, etc.) at the appropriate daily closing price.
According to the author, there are no further disclosure requirements. The taxpayer must do everything possible to enable a complete and correct assessment and must provide the information orally or in writing upon request and present any invoices, receipts and certificates (example § 135 StG-ZH). However, in a decentralized Bitcoin system, there is no third party subject to the certification requirement and able to validate end-of-year stocks. The tax authorities depend only on the information provided by the taxpayer, as is the case with cash or jewelry. An additional proof may be the printout of the portfolio balances at the end of the year. However, the disclosure of public addresses and hence of individual transactions does not seem proportionate at this point, as the payment details are privacy-protected and not necessary for proper assessment by tax authorities. In addition, a public address alone is not an appropriate means of proving ownership of the respective bitcoins as this can only be done in conjunction with the corresponding private key.
b. Valuation
The taxpayer should have some freedom in setting the daily closing price, but the method once chosen must have some degree of consistency. According to the unpublished recommendation of the FTA (Swiss Tax Conference) of March 22, 2016, bitcoins should be treated as foreign currencies for tax purposes. As of December 31, 2015, the FTA determines the value of bitcoin, which is decisive for wealth tax, by calculating the average of prices at the end of each year. This course is a recommendation to the Cantonal Tax Authorities on how to calculate wealth tax. As of December 31, 2017, this value was CHF 13,784.38 per bitcoin and CHF 3,705.37 as of December 31, 2018. In addition, as of December 31, 2018, the FTA lists the following additional cryptocurrencies (in CHF) in its price list:
FTA bases its rates on the average price from various exchanges including Kraken and BitStamp. Although they are not exchanges in the narrow sense, but platforms that aggregate cryptocurrency data, prices from Oanda and Coinmarketcap are sometimes included in the calculations. To account for the fragmentation of trading and sometimes significant daily price differences, the high and low prices are eliminated. However, the data sources are not identical for all coins, which appears to be problematic. A very small number of exchanges are used to evaluate the individual cryptocurrencies listed. Such a method of calculating the average prices of individual types of coins appears to be chaotic. This is also reflected in the fact that in some cases Coinmarketcap does not take into account classic stock exchanges. In the extreme case, this means that (after eliminating the highest and lowest values) the price is actually based on one or two randomly selected exchanges, which in the opinion of Eberhard Advisory experts is not sufficient to determine the generally applicable market value.
Tax conditions in the current Swiss legal system do not reflect the decentralized nature of Bitcoin. The wide offer of online platforms where it is possible to trade cryptocurrencies should encourage the Swiss tax authorities to take a more comprehensive approach in this area. Correctly, an assessment should be made on the basis of the average prices achieved on as many of the most popular exchanges as possible, or at least choose a trading platform to determine the average price through which the taxpayer usually conducts transactions.
It is common practice that most cantons follow the FTA recommendations when calculating wealth taxes, and the cantons argue as a conclusive argument that all taxpayers are thus treated equally. However, given the random and narrow source of data behind the individual rates, these rates sometimes feel somewhat arbitrary. Tax authorities also seem to be unaware that the various exchanges that taxpayers use have little liquidity and that therefore the sale can only take place in very small tranches as the market usually does not allow more. Price increases can therefore only be achieved over a longer period of time (with constantly changing prices). In the author's opinion, the most appropriate approach should be to apply the precautionary principle.
For the above reasons, we advise taxpayers to be careful and prudent when declaring their digital assets and not entering FTA prices into their tax return without reviewing them.
c. Capital gains
The capital gains from movable private property remain in line with Art. 7 para. 4 lit. b StHG tax free. Bitcoins have been recognized by the Swiss legal system as a business asset under Art. 8 of the StHG. However, this assumes that they are used in the context of profit-oriented commercial activities. Business assets are only assets that are used exclusively or mainly for the conduct of business (advantage method).
It seems clear that in order to distinguish business activity from private asset management, it would be best to apply criteria similar to those set out in Circular No. 36 on Securities Trading. There is, however, a certain contradiction in this regard. However, it should be taken into account that Circular No. 36 deals only with the management of the securities portfolio and is based on the current case law of the Federal Supreme Court. Since bitcoins are not securities, the circular cannot be applied directly.
Accordingly, the general jurisprudence of the Federal Supreme Court regarding the conduct of business activities is applicable here. A taxpayer obtains taxable income from running a business (and is therefore also subject to social security contributions) if he buys and sells assets in a way that goes beyond the mere management of private wealth. For this, it is imperative that such specific activity is entirely profit-making. According to the settled case-law of the Federal Supreme Court, it is always necessary to assess whether it is a private asset management or a business operation in the light of the circumstances of the case as a whole. Generally, it is understood as any activity in which the entrepreneur participates in economic transactions at his own expense and risk, using labor and capital, in any chosen organization, in accordance with the plan and in a visible way to the outside world. On the other hand, the management of one's own assets does not normally constitute conducting a business activity, even if the assets of an individual are large and the taxpayer keeps or has kept commercial accounts solely for his own needs.
The commercial nature should therefore be assumed only in a restrictive manner, for example when trading is carried out using algorithms (so-called algo trading) or bitcoin mining using a special server infrastructure. Pursuant to Art. 27 sec. 1 DBG (normative act regulating direct federal tax), the costs of business or professional activities are deducted from taxable income from business activities. This includes in particular losses incurred and recorded on the company's assets (Art. 27 (2) (b) DBG) and the costs of technological infrastructure. However, with more bitcoin mining, the necessary electricity costs can also be deducted from your income. In the absence of commercial accounting, the taxpayer must provide lists of assets and liabilities, income and expenses as well as private payments and contributions deriving from the private property of the trader (cf. Art. 125 (2) DBG).
d. Other income
Other income received in bitcoins (or other digital currencies) is taxable depending on the type of legal basis for which the income is earned, i.e. as wages, as income from self-employment, as income from movable or immovable property, as income from pensions or as other income. The FTA has not yet published any specifications or prices for calculating taxable income in bitcoin, therefore the taxpayer is free to exercise his discretion when converting to Swiss francs. However, once a system is selected, it should be used for a longer period of time.
e. Tax Evasion and Voluntary Disclosure
Anyone who, as a taxpayer, as a result of his actions intentionally or as a result of negligence, will expose the tax to depletion will be fined pursuant to Art. 56 StHG. The fine is usually equal to the amount of unpaid tax. In the case of "minor fault" it can be reduced to one third, and in the case of "significant fault" it can be increased up to three times. Therefore, it is advisable, especially in the case of larger amounts, that the declaration of bitcoins in the net assets is complete and true and consulted with a lawyer or accountant.
In Swiss tax law, it is possible to disclose the fact of non-payment of tax without incurring a penalty, if the facts are not yet known to the tax authorities. In the event that the taxpayer reports tax evasion for the first time, no criminal proceedings will be conducted if the following cumulative conditions are met:
- no tax authority, at the time of disclosing the fact of non-payment of the due tax, does not know about the non-payment of the due tax by the taxpayer,
- the taxpayer supports the administration without any reservations in determining the additional tax due
- the taxpayer tries to pay the additional tax due.
For each additional voluntary declaration of tax evasion, the fine is reduced to one fifth of the amount of tax that has been depleted under the same conditions.
f. VAT
For VAT purposes, the FTA treats digital currencies in the same way as Swiss Francs or money in a foreign currency. This means that trading bitcoins is neither a sale of goods nor a service under VAT for the Swiss tax system. Bitcoin is treated as a non-consumer tender in Switzerland and therefore exempt from VAT pursuant to Article 21 (2) of the MWSTG. If, as part of a VAT-taxed service (such as the sale of goods), bitcoin is used as a means of payment (instead of a fiat currency), these are fees as defined in Art. f MWSTG. This means that the parties do not have to charge additional VAT on the use of bitcoin as a payment instrument.
In addition to Bitcoin as the cryptocurrency with the largest market capitalization, there are now thousands of other digital currencies (known as "tokens" or "altcoins"), including Ethereum and Ripple.
In order to qualify these tokens under civil and tax law, it is always advisable to carefully analyze what rights the owner of a given digital currency is entitled to. Under Swiss law, tokens should be treated as "cryptocurrencies" in exactly the same way as bitcoins. The most common view is to classify the Ethereum protocol and the Ether token used on it also in this way. Accordingly, as of December 31, 2018, the FTA - as already mentioned above - lists the following additional cryptocurrencies in its report:
It is worth adding, however, that if units of digital currency grant their owner some additional rights - for example, if he can use them in interactions with "smart contracts", tax qualifications may vary. For example:
These are just a few examples of the use of cryptocurrency units. The actual design possibilities are as varied as the reality, but in any case they must be allowed by the given legal system. It is highly advisable to always keep in mind that laws are constantly changing. A precise analysis of the functions of a given token and its legal qualification is therefore necessary for every user before making a purchase.
Eberhard Advisory experts provide you with their knowledge and experience in the event of any questions regarding the declaration of digital currencies in the tax declaration. We are at your disposal!
