1. Introduction
The Swiss Confederation, or Switzerland for short, is a federal state located in the center of Europe. As one of the richest countries in the world, Switzerland is categorized as a highly developed industrial country with a highly diversified economy covering a wide range of fields such as finance, pharmaceuticals, precision machinery and tourism.Switzerland not only performs well economically, but also is famous for its long-term neutral stance politically. Many international organizations have their headquarters or offices in Switzerland, giving it an important position in global affairs. With its neutral political stance, advanced economy, and strict banking secrecy , Switzerland has become the world’s “most prestigious custodian of asset” and a center of international finance and business. Compared with other countries, Switzerland holds a protective and encouraging attitude towards crypto assets, and its policy is to keep up with the trend of technological development. Through timely legislation and regulation, crypto assets in Switzerland have gradually been given equal treatment with traditional financial assets, which encourages the world’s capital to pour into Switzerland and enter the related industries. According to a 2020 report, about 900 blockchain companies have emerged in Switzerland over the past few years, employing a total of about 4,700 people, which shows how friendly Switzerland is to crypto assets. This article will analyze the cutting-edge dynamics of Switzerland’s cryptocurrency taxation and regulation from four dimensions: Switzerland’s characterization of crypto assets, the basic tax system, the crypto asset tax system, and cryptocurrency regulatory policies, and predict its future development direction to provide investors with cutting-edge information.
2.Switzerland’s Characterization of Crypto Assets
2.1 Classification of Crypto Assets
According to the inquiry guide to the initial token offering (ICO) regulatory framework issued by the Swiss Financial Market Authority (FINMA) in February 2018, crypto assets can be categorized into three types: payment tokens, utility tokens, and asset tokens.
2.1.1 Payment Tokens
Payment tokens (e.g., BTC and ETH), often synonymous with cryptocurrencies, are digital assets that are used to purchase goods and services, or to make monetary or value transfers. Unlike traditional currencies issued by centralized institutions, cryptocurrencies do not create any claims or ownership rights for their issuers. Such tokens represent “blockchain value” only, and are designed to act as a means of payment for goods and services, thus embodying a virtual value recognized within the blockchain system. Payment tokens are not defined as a type of security.
2.1.2 Utility Tokens
Utility tokens are tokens that provide users with digital access to applications or services, such as concert tickets or store coupons, through a blockchain-based infrastructure. The characteristics of utility tokens vary depending on the context: if the purpose is limited to authorizing access to an application or a service and the token does have this functionality, it will not be considered a security; if a utility token is issued with an additional or only investment purpose, the Swiss Financial Market Supervisory Authority (FINMA) will consider such tokens as securities (i.e., the same as asset-based tokens).
2.1.3 Asset-based Tokens
Asset-based tokens, represent assets such as debt or equity that are burdened by the issuer. For example, asset-based tokens promise a share of future corporate earnings or future capital flows. Thus, in terms of economic function, these tokens are similar to stocks, bonds or derivatives. Tokens that enable physical assets to be traded on the blockchain also fall into this category. Tokens of this type are considered as securities.
2.2 Characterization of Crypto-assets and Their Trading
Depending on their function, the Swiss Financial Market Authority defines payment tokens as “non-securities” payment methods, more similar to currency; asset tokens are defined as “securities” close to financial products, while practical tokens distinguish their attributes based on whether they have additional investment purposes. It is worth noting that the categorization of a crypto asset is not a clear-cut one, and there are also HybridTokens. Also, due to the nature of the asset, the three types of tokens are subject to different legal jurisdictions under the original financial regulatory framework and are taxed differently.
3. Basic Swiss Tax Policy
3.1 Swiss Tax System
Switzerland is one of the countries in Europe with the lowest tax burden for both natural and legal persons. Direct taxes on natural persons are levied annually on a self-declaration basis and paid in installments the following year. Just as this country is structured on a federal level, the Swiss tax system is divided into three levels - federal, cantonal and local - each with its own tax competencies and tax types. The federal government, 26 states, and local municipalities each levy taxes, and both businesses and individuals are required to pay all three levels of taxes (federal, state, and municipal taxes). Federal taxes account for about 30% of the country’s total tax revenue, states for 40% and municipalities for 30%. The country’s tax system adopts the principle of territoriality. Any joint-stock company, limited liability company, limited partnership company, or cooperative established in accordance with Swiss law or the relevant laws of other countries must pay direct federal and state/municipal taxes as required.
3.2 Income tax
3.2.1 Corporate Income Tax - Federal Government
The Swiss federal government levies a flat income tax of 8.5% on the after-tax profits of joint-stock companies and cooperative companies. A flat rate of 4.25% applies to associations, foundations, other legal organizations and investment trusts. The federal government does not levy capital tax.
Legal persons domiciled in Switzerland, i.e. Swiss joint-stock companies, limited liability companies, joint-stock companies, cooperatives, associations and foundations, as well as collective capital investments through direct property holdings, are liable for tax. Non-resident enterprises are taxed only on income derived from sources in Switzerland, i.e. on income and capital gains contributed by a business, permanent establishment or real estate located in Switzerland, where income from real estate includes income from real estate transactions.
3.2.2 Corporate Income Tax - State and Municipal
State and municipal taxes are harmonized and most of the profit determination provisions usually apply accordingly at the state and municipal levels. For corporations that pay taxes regularly, the combined effective profit income tax rate (for both direct federal and state and municipal taxes) ranges between 11.9% and 21.6% in 2020, depending on the different provisions of the state and municipal authorities.
3.2.3 Individual Income Tax
Individuals permanently or temporarily residing in Switzerland are subject to federal and cantonal/municipal taxes. Individuals are considered to have a temporary residence (domicile) in Switzerland if they: a) stay in Switzerland for at least 30 days and engage in a professional activity or b) stay for at least 90 days without engaging in any professional activity. The Swiss tax system does not cover partnerships, so the partners in a partnership are taxed separately by the tax authorities.
Swiss resident individuals are taxed on their worldwide income. The exception is income from business activities abroad as well as from permanent establishments and real estate abroad, which is used only for the purpose of determining the applicable income tax rate (exemption under the progressive tax exemption law). Taxable income also includes nominal rents from the resident’s residential property. Individual tax rates are generally progressive, with a maximum rate of 11.5% applicable in the Swiss Confederation. The cantons are free to set their own tax rates. The applicable maximum tax burden therefore varies significantly from canton to canton (10.33% to 27.09% for the cantonal capitals).
3.3 Corporate Capital Tax
Capital tax is levied annually only by the tax authorities at the cantonal/municipal level. The capital tax is based on the net equity of the company (i.e. share capital, capital surplus, legal surplus reserve, other surplus reserve, retained earnings) in the manner of calculation. The company’s taxable base also includes all provisions that do not qualify for tax deductibility, all undisclosed other surplus reserves, and debt that has the character of economic equity under Swiss capital weakening legislation. Some cantons provide a credit against capital tax for income tax on a company’s profits in that canton. Capital tax rates vary from canton to canton and depend on the tax status of the company. 2020, the range is between 0.0010% and 0.51%. The states may provide for tax deductions on taxable capital arising from qualifying participations, patents and loans to companies belonging to the group.
3.4 Personal Wealth Tax
Wealth tax is levied only by the cantons/municipalities in accordance with the tax laws and rates of the canton. The tax is assessed on the basis of net assets. Net assets include real and movable property (e.g. marketable securities and bank deposits, redemption value of life insurance (cash), automobiles, shares in undistributed estates, etc.). Assets that do not generate any income are also taxed. Equity interests in foreign enterprises and real estate in foreign countries are not subject to property tax. However, when calculating the applicable wealth tax, if progressive tax rates (progressive retention) are used, these assets need to be included in the accounts together. Individuals can deduct debts and exemptions from the total amount of assets. Most state wealth taxes are progressive, and states have the right to set their own rates. As a result, the maximum tax burden varies widely from state to state, ranging from 0.135% to 0.870%.
3.5 Inheritance and Gift Tax
Switzerland does not have a uniform system for the collection of inheritance and gift tax. They are levied by the cantons themselves, and the relevant cantonal laws vary considerably in almost every respect. With the exception of the canton of Schwyz, all cantons impose inheritance and/or gift taxes on certain transfers of property, provided that the deceased or the donor was a resident of the canton or that the real estate bequeathed or gifted is located in the canton. Both taxes are essentially progressive, and the amount of the tax is usually calculated on the basis of the relationship between the decedent or donor and the beneficiary and/or the amount of property received by the beneficiary. All states do not impose estate or gift taxes on spouses, and most states exempt immediate heirs from such taxes.
3.6 Withholding Tax
The Swiss Confederation levies withholding tax at source on the gross amount of dividends distributed by Swiss companies, income from bonds or similar debt instruments issued by Swiss issuers, income from Swiss investment funds and interest paid on deposits by Swiss banking institutions. Gains from activities such as betting and lotteries, which are not exempt from income tax, are also subject to withholding tax, as are insurance premiums. The debtor is usually responsible for paying the tax, which must be deducted in full, regardless of whether the beneficiary is entitled to a partial or full refund. A refund is possible only if the income is declared as required and the beneficiary is entitled to use the income subject to withholding tax. Withholding tax is refunded by way of a tax rebate for corporate taxpayers and credited by way of the regular tax procedure for Swiss resident individuals. For non-resident taxpayers, the withholding tax is the final tax liability. However, non-resident taxpayers may be entitled to a partial or full tax refund under international double taxation agreements or bilateral agreements between Switzerland and the beneficiary’s country of residence.
3.7 Value Added Tax
Although Switzerland is not a member of the European Union, its VAT system is structured in accordance with the EU’s Sixth Council Directive on the Harmonization of the Laws of the Member States relating to Taxes on Transfers. Swiss VAT is levied only at the federal level as an indirect tax on most goods and services and applies at all stages of the production and distribution chain. It is a tax payable by suppliers of goods or services (i.e. the tax liability is based on payment by the recipient of the goods or services). Effective January 1, 2018, the standard tax rate for all taxable goods and services is 7.7%. A lower tax rate of 3.7% applies to accommodation services. A lower tax rate of 2.5% applies to basic needs goods and services.
The Federal Tax Administration offers a simplified method of accounting for VAT for small businesses with sales revenues of up to CHF 5,005,000 and taxes payable of up to CHF 103,000 per year. These small businesses can choose to calculate VAT at a one-time rate lower than the standard rate without having to pay input tax if they waive input tax accounting. The simplified method requires the approval of the Federal Tax Administration and remains in place for at least one year. Compared to quarterly accounting, the simplified method requires only two VAT returns per year.
4. Switzerland’s Crypto Tax System
4.1 General overview of the Swiss crypto tax system
In Switzerland, the tax policy for crypto assets is based on the existing tax law framework. The Swiss Federal Tax Administration (FTA) has detailed the tax treatment of cryptocurrency activities in its recently updated working paper. As mentioned earlier, crypto assets can be categorized into payment tokens, asset-based tokens and utility tokens, and the tax treatment varies depending on the nature of the different categories of tokens.
4.2 Taxation of Payment Tokens
Payment tokens (i.e., cryptocurrencies) such as BTC and ETH are used for payment purposes without any obligation on the part of the issuer to provide services or make payments. Cryptocurrencies are subject to the focus of the Swiss Anti-Money Laundering Article Act (AMLA), which characterizes them as foreign currency and imposes income/wealth tax on individuals and capital gains tax on companies. Individuals or companies are subject to different taxes depending on the taxable behavior.
The holding of payment tokens is treated as foreign exchange and is considered a movable capital asset subject to wealth tax at the cantonal level. Whereas in the case of mining for payment tokens, if one qualifies as self-employed, it is treated as self-employment income subject to income tax, while mining-related expenses are deductible on a pre-tax basis. Pledging refers to locking tokens on a proof-of-equity blockchain for a period of time to validate the process of generating new tokens. In the case of pledging, the owner of the tokens will not be able to use them during the lock-in period. In return for providing the tokens, they receive compensation from the pledge pool, and these gains are subject to income tax. In the case of an airdrop, the owner of the cryptocurrency receives additional units of that cryptocurrency free of charge without having to take any action, and the proceeds of the airdrop are also subject to income tax.
4.3 Taxation of Asset-based Tokens
Financial products or services and financial entities related to asset-based tokens are subject to laws such as the Stock Exchanges and Securities Trading Act (SESTA), the Financial Market Infrastructure and Market Conduct in Securities and Derivatives Trading Act (FMIA) and the Financial Services Act (FinSA). Asset-based tokens are usually raised through Initial Token Offerings (ICOs/ITOs), and all asset-based tokens are treated as movable assets subject to wealth tax, while profits received from their use as financial assets are treated as income subject to income tax, and are applied in the following three scenarios. First, debt tokens are regarded as bonds, which are required to repay the investment and pay interest, and the interest income is subject to income tax. Second, contract-based asset-based tokens do not require repayment of the investment; the investor receives some percentage of the issuer’s proceeds, and the income is subject to income tax. Third, asset-based tokens with participation rights are equivalent to shares or participation certificates, and income from dividends is subject to income tax.
4.4 Taxation of Utility Tokens
Utility tokens provide access to a blockchain application or service with no obligation to repay the investment. Utility tokens are usually tradable and subject to wealth tax at market value. There are no income tax implications as the issuer is not required to make payments to investors.
4.5 Tokens Trading
All types of token trading are treated as regular securities transactions for tax purposes and are equivalent to ordinary transfers of securities, which are treated as private property management, whereas capital gains from private asset management activities are exempt from tax, but capital losses are not deductible. If the trading activity is considered self-employment, capital gains are subject to income tax and losses are deductible on a pre-tax basis.
5. Recent Developments in Swiss Crypto Asset Regulation
Since the development of cryptocurrencies, Switzerland has been actively promoting the advancement of its regulatory system to adapt financial regulation to the development of blockchain technology and crypto assets. Compared with countries that legislate separately to strictly regulate crypto assets, Switzerland’s regulation of crypto assets builds on the original law and modifies the relevant regulations based on the nature of different tokens. The provision of cryptocurrency exchanges and custodian services is legal in Switzerland and is regulated by the Swiss Federal Tax Administration (SFTA) and the Swiss Financial Market Supervisory Authority (FINMA). As mentioned earlier, Switzerland categorizes cryptocurrencies and virtual currencies as assets or property, and exchanges and virtual currency platforms are considered equivalent to financial institutions, so the legality of exchanges depends on the nature of the assets and investor protections, and they must comply with local anti-money laundering (AML) and counter-financing of terrorism (CFT) and consumer protection obligations, except that certain banking rules and thresholds are more lenient.
At the end of 2015, in response to the rapid development of new technologies in the financial markets, Switzerland established a “FintechDesk” with the aim of providing the public, start-ups and established financial service providers with information on the interpretation of current financial market laws relating to fintech.In September 2017, the Swiss Financial Markets Authority (FINMA) published its Guidelines for the Regulation of Initial Token Offerings (ICOs), which set out FINMA’s position on ICOs, highlighting areas where existing financial legal markets may cover ICOs, and improved on this with the publication of a second guide on ICOs in February 2018 In December 2018, the Federal Council, based on the principles of technological neutrality and market prioritization, published a “Block Chain Legal Framework” report to provide recommendations for legislation. Based on this, in November 2019, the Swiss Federal Government issued the Federal Act on the Adaptation of Laws to the Development of Distributed Ledger Technology (DLT Act), a law that aims to revise and update existing laws and regulations to better adapt to and support the development of blockchain and distributed ledger technology (DLT), which sets out rules on cryptocurrency licensing, trading, anti-money laundering, financial market infrastructure for trading cryptocurrencies and bankruptcy rules. As evidenced by its “technology-neutral” principle, the DLT Act is not intended to severely restrict the blockchain market, but rather to emphasize the protection of the integrity and stability of the Swiss financial market, with the aim of protecting financial participants and the market as a whole. currency exchanges and the legality of cryptocurrency transactions under Swiss law. The legislation requires compliance with local Initial Coin Offering (ICO), Anti-Money Laundering (AML), and Countering the Financing of Terrorism (CTF) requirements once tokens can be technically transferred to a blockchain infrastructure.
On November 10, 2023, the Swiss Financial Markets Authority (FINMA) released a statement announcing that Switzerland and 48 other countries, including the United Kingdom, the United States, Germany, France, Canada, and Australia, will implement the Crypto Asset Reporting Framework (CARF) by 2027. The Crypto Asset Reporting Framework (CARF) was issued by the OECD Tax Transparency and Exchange of Information Forum (Global Forum), which provides for the automatic exchange of tax information on crypto assets with the aim of promoting tax transparency in offshore financial accounts. As a global financial center, Switzerland, with the enthusiastic response of major European and American countries, is of course actively involved in international cooperation to enhance its reputation as an international financial center and ensure the stability and security of its financial system. At the practical regulatory level, the framework may passively strengthen the Swiss government’s mastery and control of crypto asset information.
6. Summary and Outlook
It can be predicted from Switzerland’s accession to CARF that the regulation of crypto assets in Switzerland may continue to be influenced by the international community, and with the increasing regulatory requirements on crypto assets in the international community, Switzerland may further refine and strengthen the compliance requirements on crypto assets in order to ensure the transparency and security of its financial system. In the face of the shaky global financial market, the Swiss government may subsequently be more cautious and strictly comply with international standards in order to maintain its international credibility.
We believe that all compliance and regulatory actions in Switzerland are ultimately for the betterment of the financial industry. “Technology neutrality and market prioritization” will remain the first principle of crypto-asset regulation in Switzerland. The Swiss government will continue to support the development of crypto-asset technology and blockchain, and will make timely adjustments according to the new trends and challenges in the crypto-asset market, so as to ensure the flexibility and effectiveness of the regulatory framework. For example, in order to avoid the impact of strict tax regulation on centralized exchanges, its decentralized alternatives such as DEX may receive favorable policies; at the same time, crypto assets outside the regulation of CARF, such as closed-end crypto assets, central bank digital currencies (CBDCs), and specific e-currency products, may also have the potential for development.
