Tax-free capital gains on crypto assets
When the rules change the game

On Friday, Stéphanie Fuchs Consulting reported live from the Czech Republic during the Emergence conference about a significant change in their tax policy: the abolition of capital gains tax on long-term Bitcoin holdings. Starting in 2025, investors holding cryptocurrencies for more than three years will enjoy tax-free gains. This sparks broader discussions on how digital assets are taxed globally.

For all Swiss investors, this shall also serve as reminder not to take tax-free capital gains for granted and not to jeopardize it carelessly.

There recent development are reason enough to dive deeper into the concept of tax free capital gains and what to be considered.

The new rules in the Czech Republic: What is changing?
The Czech Republic’s policy, effective January 1, 2025, introduces significant changes to its crypto tax framework:
1. Capital gains tax abolished: Digital assets held for over three years, including Bitcoin, will be exempt from capital gains tax. This creates parity between cryptocurrencies and traditional securities. However, as the definition of digital assets is still unclear there is also uncertainty associated with this legislative chagne.

2. Encouragement of long-term holding: By promoting a long-term investment horizon, the policy discourages speculative trading and supports a more stable digital asset market.

3. Simplification of taxation: These changes reduce administrative complexity, making compliance more straightforward for both investors and tax authorities.

A detailed guidance to these legislative changes is expected to be published soon in order to provide for legal certainty required.

How tax-free capital gains work in Switzerland
A unique feature of the Swiss tax system is that capital gains on privately held movable assets, such as stocks, securities, and certain digital assets, are generally tax-free. This tax exemption is a central pillar of the Swiss tax framework and one of its most attractive features.
However, to prevent misuse of this favorable treatment, Swiss tax authorities have developed specific rules and classifications, such as the Swiss participation dealer and the Swiss securities dealer, to evaluate whether activities exceed private wealth management.

General rules for tax-free capital gains
In principle, private individuals can realize tax-free capital gains from the sale of movable assets, provided those assets belong to their private wealth. However, any activity that goes beyond simple private wealth management may trigger classification as professional or self-employment activity, resulting in taxable income treatment.
Key considerations include:

• Beyond private wealth management: Any activity that exceeds the scope of simple asset management may be classified as professional.
• Full-time employment is no shield: Even individuals employed full-time may face scrutiny if they engage in occasional or secondary trading activities.

The professional securities and participation dealer
For the classification of a professional securities dealer, particularly in the case of portfolio investors, the following criteria are in the focus based on the circular 36 of the Swiss Federal Tax Administration:

1. Transaction volume: High transaction volumes may indicate professional trading.
2. Debt financing: The use of leverage or debt to fund investments is a significant factor.
3. Use of derivatives: Frequent use of derivatives, such as options or futures, raises red flags.
4. Holding period: Short holding periods can suggest speculative activity.
5. Relevance to living expenses: If capital gains are a significant source of income, they may be taxed as professional income.

The assessment of a possible qualification as professional securities dealer is performed on a case-by-case assessment.

For digital assets, the primary focus of this assessment is often on the use of external financing.

Tax implications for professional trading activities
If an individual is classified as engaging in professional securities dealer:

• Income tax applies: Capital gains are treated as self-employment income and are subject to income tax.
• Social security contributions: Profits become subject to social security contributions.
• Capital losses are deductible: In contrast to private wealth management, capital losses can be deducted from taxable income.

These rules underscore the importance of maintaining clear boundaries between private and professional activities to retain the benefits of tax-free capital gains.

At the same time, it is essential not to lose sight of the participation dealer. As explained in an earlier newsletter (click here for further information), a recent court decision has brought this less prominent concept back into focus. This classification is particularly relevant in the sale of asset-backed tokens, where participation dealer rules may apply.

This brings us to the next chapter. While the above outlines the general tax rules, when investing in digital assets, it is always crucial to delve deeper.

Three key points to remember
When it comes to digital asset investments, the details matter. General tax rules provide a solid foundation, but every transaction has its own nuances. Whether you are buying, selling, or holding tokens, it is critical to ask the right questions to ensure compliance and avoid unexpected consequences.

These three points will guide you in assessing the tax implications of your investments and help you navigate this complex landscape effectively:

What does the token represent?

• Is it a payment token, utility token, or asset-backed token?
• The classification determines the foundational tax implications and the nature of the asset represented by the token.
  
  

What is the nature of the transaction?

• Is it a sale, transfer, or another action?
• The type of transaction directly affects its respective taxation.

What are the potential consequences?

• Depending on the nature of the token and the transaction type, the specific taxation rules will apply.
• Only understanding both aspects will lead to the correct tax assessment.

For example, if an asset-backed token represents shares, the sale may trigger participation dealer rules. In contrast, the sale of cryptocurrencies must be evaluated under the rules for securities dealers.

Final thoughts: Digital assets are not a niche market
The Czech Republic’s move reflects a global shift toward rethinking how digital assets are taxed, emphasizing the importance of long-term investment strategies and simplicity in tax frameworks. This evolution is a clear sign that the digital asset space is no longer a niche market but a fundamental pillar of modern economies.

For Swiss investors, this changing landscape is a reminder that the privilege of tax-free capital gains comes with responsibilities. By understanding the nuances of securities dealer classifications and adhering to the rules, investors can continue to benefit from Switzerland’s unique position as a global leader in digital asset innovation.
As the boundaries between traditional finance and digital assets continue to blur, staying informed and adaptable will be key to navigating this new era. 

Have questions about how these changes might impact your investments? Let us talk. Staying informed ensures you remain in the driver’s seat of your taxes and ahead of the curve.