In 2018 the Swiss Federal Tax Administration (SFTA) adjusted its guidelines in respect to the taxation of cryptocurrencies through the use of a value-added tax (VAT). A VAT acts as an incremental goods and services tax at all stages of production.
These updated guidelines (MWST-Info 04) define cryptocurrencies as value units generated on a digital ledger network known as a blockchain. Complex algorithms are solved using a computer’s GPU to generate decentralized tokens that are “minted” and constantly verified by the blockchain network.
Initial Coin Offering and Initial Token Offering
Initial coin offering (ICO) and initial token offering (ITO) allow a company to sell off tokens to raise investment for a specific venture. In exchange, buyers are issued blockchain-verified cryptocurrencies. Assessing VAT taxation against this currency depends on the way it was initially distributed during the ICO or ITO phase. The structure of the initial offering and any benefits that the token-holder receives is relevant when determining its VAT status under the new framework. The SFTA draft (VAT-Info 04) outlines the VAT status between three categories of cryptocurrency:
Payment tokens act like typical currencies and are used to buy goods and services. As such, the SFTA treats payment tokens as if they were official currency. Rather than an exchange transaction, using payment tokens for market transactions is considered remuneration and depends on the value of the goods or services at the date and time of the transaction in question.
Like the exchange of foreign currencies, when official currencies are used to purchase and sell payment tokens, it is considered a non-relevant exchange for taxation purposes. Commissions, when collected, are considered exempt from VAT.
The platforms of exchange themselves are not entirely exempt from value-added taxation. Swiss exchanges are expected to pay VAT if the trader lives within Switzerland. Suppliers of electronic stores for cryptocurrency known as ‘wallets’ are likewise subject to VAT. If the holder of the cryptocurrency lives in Switzerland, VAT will also apply to the storage of tokens on digital media.
Utility tokens grant benefits or services to the holder on behalf of the original issuer. Issuing utility tokens are typically considered a service and subject to VAT if the receiving party lives in Switzerland. This does not apply when the benefits granted by the utility token are already exempt from paying VAT.
Like regular shares, asset tokens represent an entitlement to a proportionate share of a company’s profit, revenue, or other rights specified during the exchange. In relation to uncertified security and derivatives, issuing asset tokens is considered turnover and is thus exempt from VAT.
The generation of cryptocurrency using a computer’s processing power is known as “mining”. As the computer solves highly-complex algorithms, it submits proof of work to certify and “mint” new units of value. Crypto-miners receive a payout from the blockchain when new tokens are generated, which is not considered as being an exchange of goods or services. Therefore, blockchain payouts are exempt from VAT. The crypto-miner is also paid a transaction commission when the tokens are transferred over the blockchain. This income is treated as income generated doing work in the financial sector and is therefore exempt from VAT.
Buying official currencies using tokens requires documentation that proves the date of conversion and the exchange rate. To collect a VAT on goods and services purchased with cryptocurrency, the price of the product is converted into a recognized official currency: receipts for products paid for in cryptocurrency must provide an official price and VAT in both formats. The invoice for a VAT must show official currency values alongside cryptocurrency values and is owed to the SFTA in Francs.
The SFTA’s updated framework boosts the institutional transparency of how cryptocurrency is taxed in regard to value-added taxation. Some tax professionals commend Swiss policy for assuming regulatory leadership aligned with our increasingly connected and constantly innovating global market. Although VAT might annoy some holders of crypto, the improved clarity and dependability of the market greatly benefit Swiss blockchain enterprises.
This article was written based on the SFTA’s first draft of guidelines and before meeting with the Consultative Body. The content of the SFTAs initial draft may vary widely from the final guidelines.