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Martin Burri
Partner Tax & Legal Services, PwC Switzerland
Switzerland played a pioneering role by awarding two crypto banks fully-fledged banking licences in 2019. Since then, more and more banks have either introduced or expanded their crypto trading service offerings. Digital assets are not only popular among crypto enthusiasts but form an integral part of many balanced portfolio allocations.
Trading in digital assets works differently to trading in traditional assets in a number of ways. The conventional intermediary functions commonly associated with traditional assets trading, such as clearing and settlement, may not be necessary. Moreover, the nature of the digital assets being traded often diverges significantly from that of traditional assets. For this reason, a bank that offers crypto trading has to be aware of the tax liabilities and the respective filing and reporting obligations involved.
In this article, we highlight the most relevant Swiss tax aspects for Banks and other financial institutions with a digital assets trading offering.
1. Withholding Tax (‘WHT’)
In Switzerland, interest paid on bonds, bond-like instruments or so-called client accounts (‘Kundenguthaben’) is subject to withholding tax of 35%. In the case of banks falling within the meaning of banking legislation, in principle all interest paid by the bank is subject to withholding tax (with some exceptions). A non-bank can become liable to pay withholding tax if – amongst others – it continuously accepts funds against interest and the total owed amount is at least CHF 5m.
In the context of staking, it has to be assessed whether a withholding tax liability of the Swiss crypto intermediary (e.g. a Swiss bank) is created with respect to staking rewards credited to clients.
Staking can be organised on-chain (self-driven or in an on-chain staking pool) or off-chain in a staking pool. While on-chain staking should typically not create a withholding tax obligation, off-chain staking, where a Swiss crypto intermediary arranges an off-chain staking pool or otherwise acts as an intermediary in the staking process, can potentially trigger a withholding tax obligation.
The assessment depends on factors such as whether there are segregated portfolios, whether the assets are off or on the balance sheet or whether the crypto intermediary qualifies as a bank in the sense of the banking legislation, etc.
2. Transfer stamp tax
The transfer of taxable securities against consideration is subject to transfer stamp tax if a Swiss securities dealer (in the sense of the Stamp Tax Act) is involved in the transaction. The tax rates are 0.15% for Swiss securities and 0.3% for foreign securities.
While payment tokens and utility tokens do not qualify as taxable securities and are therefore exempt from transfer stamp tax, other digital assets can qualify as taxable securities. In particular, debt tokens, tokenised shares, bonds or fund units (i.e. under the new distributed ledger technology ‘DLT’ law) and tokens that constitute a derivative whose underlying is another taxable security (e.g. a share) can qualify as taxable securities.
Swiss banks qualify as securities dealer. Additionally, companies that act as a broker or asset manager / investment advisor of taxable securities may fulfil the conditions to qualify as securities dealers (in the sense of the Stamp Tax Act) and are obliged to register with the Swiss Federal Tax Administration (‘SFTA’). Securities dealers that have an intermediary function on the trading of digital assets that qualify as taxable securities have to declare these transactions in their transfer stamp tax register and pay the transfer stamp tax on these transactions.
3. Value Added Tax
Swiss VAT also adds a layer of reflections and points to consider. Although the SFTA has been one of the first tax authorities to publish guidance in connection with crypto assets, both in reality and in practice crypto-related activities still trigger very complex questions and potentially sizeable consequences regarding the VAT position of the various stakeholders.
The qualification of tokens, the classification of flows and the identification of various stakeholders (in what capacity are they acting?) along with their respective roles must be taken into consideration when determining which VAT treatment is applicable.
Based on the SFTA’s practice, for some transactions there is a clear guideline in place regarding how to treat them from a VAT perspective. For example, this is the case for the sale and acquisition of tokens that qualify as payment tokens from a VAT perspective (which might differ from the FINMA qualification). As these types of tokens are deemed to be means of payment, the exchange (sale and acquisition) of such kind of tokens will follow the same VAT treatment as standard fiat FX transactions. It is important to note that the transfer of utility tokens may be considered as taxable transactions from a Swiss VAT perspective. It is therefore very important to understand what role the Swiss bank has in these transactions.
Special attention has to be given to the staking of tokens. Depending on the contractual setup of the staking and the role of a Swiss intermediary (i.e. a crypto bank) in the staking process, the staking rewards on utility tokens may be subject to VAT.
4. Reporting obligations of Swiss banks and other financial institutions
The issue of whether digital assets should be included in existing reporting frameworks such as FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard) has sparked intense discussions over the past few years, resulting in two distinct and contrasting viewpoints. Some take the position of treating digital assets the same way as traditional assets and classifying them as financial assets.
This position mainly derives from the view that the US Commodity Futures Trading Commission once stated that cryptocurrencies and assets should be regarded as commodities. Since commodities are defined as financial assets according to the US Final Regulations, they should be reported under FATCA.
On the other hand, there have been good arguments in favour of the position that neither the definition under FATCA nor under CRS includes digital assets. Furthermore, neither the IRS for FATCA nor the OECD for CRS has ever taken a position in clarifying the interpretation.
As the interest in digital assets continues to surge, tax administrations have shown an increasing interest in obtaining tax information related to cryptocurrencies. Currently, there are discussions ongoing in the US on how to add cryptocurrencies and crypto assets to the ‘tax reporting world’.
With the issuance of the Tax Green Book, the Biden administration has clearly put the implementation of a reporting framework on the agenda. Simultaneously, the OECD has made advances in developing the Crypto Asset Reporting Framework (CARF), which essentially extends the coverage of CRS to encompass crypto assets. The EU will be the first player to implement this new framework with the help of DAC8.
The new reporting regime (CARF and DAC8) defines the crypto assets to be reported and sets the obligation for Crypto Asset Service Providers to report on crypto transactions. A Crypto Asset Service Provider is defined as an individual or entity that, as a business, provides a service effectuating exchange transactions for or on behalf of customers, including by acting as a counterparty or as an intermediary to such exchange transactions or by making a relevant trading platform available.
On the other hand, the OECD has also amended some elements in the existing CRS in order to close any loopholes relating to digital assets. One of the key elements is the expanded definition of financial assets and investment entities, which is intended to ensure that derivatives which reference crypto assets and which are held in custodial accounts and by investment entities are subject to CRS reporting requirements.
These new developments may now bring a bank within the scope of CARF and the updated CRS rules (once implemented). Depending on its exact service offering, a bank or other financial institutions could be classified as a Crypto Asset Service Provider in addition to its classification as a Reporting Financial Institution.
As a consequence, this could potentially lead to double reporting. Furthermore, the reporting under CARF – unlike the reporting under CRS – is a new ‘transaction-based’ reporting regime, which will add additional complexity to the implementation.
Currently, the OECD CARF has not been declared as a minimal standard and Switzerland is not in the EU. Therefore, there is no implementation timeline in Switzerland in place. However, based on historical evidence from the implementation of FATCA and CRS, it is our expectation that Switzerland will also implement these new reporting frameworks.
5. Crypto funds – investor reporting
Like traditional funds, crypto funds registered for public distribution in Switzerland are legally obliged by FINMA and the Ordinance to the Swiss Collective Investment Schemes Act (CISO) to ensure transparent reporting of Swiss taxable income values both to Swiss private investors and to the SFTA.
This reporting requirement empowers investors in differentiating between tax-exempt and taxable components, thereby enabling them to leverage advantageous tax treatment. Capital gains very often serve as the predominant return drivers in crypto funds, and it is therefore important to have a proper investor reporting system in place in order to prevent this income from being taxed.
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