Tax challenges for crypto investors: What you should be aware of

In the exciting world of cryptocurrencies and digital assets, there are not only opportunities for high returns but also tax pitfalls that investors should be aware of. Those who invest in this area should keep an eye on the potential tax impacts to avoid unpleasant surprises at tax settlement time.

Tax Traps in Crypto Investment

The good news is that capital gains from the sale of movable assets are usually tax-free. However, this can change if your investment activities are so intensive that you are considered a professional securities trader. In this case, your gains are subject to income tax and social security contributions.

Checklist to Avoid Tax Traps

To determine whether you might be considered a professional securities trader, you can use a checklist. This is based on Circular No. 36 of the Federal Tax Administration and offers an initial assessment. Here are the criteria at a glance:

1. Holding Period: The securities sold should have been held for at least six months.‍
2. Transaction Volume: The transaction volume (total of all purchase prices and sale proceeds) should not exceed five times the value of securities and credits at the beginning of the tax period.‍
3. Necessity of Capital Gains: Capital gains should not be necessary to replace missing or lost income for living expenses. This is the case if the realized capital gains are less than 50% of the net income in the tax period.‍
4. Financing: The investments should not be leveraged, or the taxable income from the securities should be greater than the proportional interest expenses.‍
5. Derivative Transactions: The buying and selling of derivatives (especially options) should be limited to hedging your own securities positions.

Individual Examination in Case of Doubt

Despite this checklist, the high volatility and complexity of crypto assets may mean that the cumulative fulfillment of the mentioned five criteria is not possible. In such cases, an individual examination of the specific case is necessary, with criteria 2 and 4 treated as a priority.

Tax Consequences

If you realize capital gains as a professional securities trader, they are subject to income tax and social security contributions. At the same time, capital losses can be deducted and carried forward over seven years, which can be advantageous during times of market uncertainties.