With the recent approval by the SEC of Bitcoin spot ETPs, there has been increased discussion on how jurisdictions regulate and tax cryptocurrency.  Between the US’s inability to determine whether crypto is a security or a commodity (or both) and China simply outright banning them, the majority of Western countries have, at times, struggled to adapt their existing regimes to this new financial medium.

In my particular area of expertise, assisting investors and expats in Australia and Switzerland, the landscape of cryptocurrency regulation and adoption presents a stark contrast between the two countries. As they both navigate the evolving realm of digital currencies, their distinct approaches offer insights for sophisticated investors experienced in cryptocurrency.

Swiss Embrace of Cryptocurrency

Switzerland, particularly its cantons, has been a frontrunner in embracing cryptocurrency. The Swiss canton of Zug, known as the “Crypto Valley,” is notable for accepting Bitcoin (BTC) and Ethereum (ETH) for tax payments, reflecting the country’s progressive stance towards digital currencies. 

Additionally, the city of Lugano in Switzerland has also announced its readiness to accept tax payments in cryptocurrencies like Bitcoin and Tether (USDT). This initiative is part of Lugano’s broader strategy, known as Plan B, to integrate Bitcoin technology into the city’s financial system.

Indeed, Lugano has positioned itself strongly as a crypto-friendly city, developing its own cryptocurrency and wallet app which is accepted by over 400 businesses throughout the canton. 

The tax treatment of cryptocurrency gains in Switzerland is quite favourable for private investors:

Capital Gains Tax Exemption: For private investors in Switzerland – Capital Gains Tax does not apply to private wealth assets. Capital Gains Tax only applies if you’re a self-employed trader or a business. So, unless you are an active trader in crypto, the value of your assets will be included in the general Wealth Tax and you’ll be taxed according to the specific Canton you reside in.

Wealth Tax: Cryptocurrencies are taxed under the Wealth Tax system. The Swiss Federal Tax Administration (FTA) annually defines the taxation value of the most commonly used cryptocurrencies, which taxpayers need to refer to when declaring their crypto assets​​.

Income Tax: Income Tax may apply in cases where crypto is seen as a form of earnings, such as receiving cryptocurrency as salary or accepting it for services rendered by self-employed individuals​​. The Income Tax rate in Switzerland includes Federal, Canton, and Municipal Income Tax, and is progressive or flat-rate depending on the canton​​.

Other Considerations: Certain crypto transactions like buying, selling, trading, and transferring crypto are tax-free for private investors. However, activities like airdrops are subject to Income Tax​​​​​​. The tax treatment of crypto gifts and donations, mining, margin trading, derivatives, and DeFi activities varies and may depend on the specific circumstances and the canton​​.

Overall, Switzerland’s regulatory approach to cryptocurrency is progressive and investor-friendly, with an emphasis on distinguishing between private investors and professional traders or businesses for tax purposes.

Australian Rigour:  Trade and be Taxed!

Australia’s approach to cryptocurrency regulation is more cautious. The Australian government classifies cryptocurrencies as property, making them subject to Capital Gains Tax (CGT).  Unlike Switzerland, Australia does not permit the use of cryptocurrencies for tax payments, indicating a more conservative stance towards digital currencies.

In Australia, the taxation and regulatory approach to cryptocurrency for individual taxpayers involves several key aspects:

Capital Gains Tax (CGT): Cryptocurrency is subject to Capital Gains Tax when disposed of, which includes selling, trading, spending, or gifting crypto. If held for more than a year, individuals are eligible for a 50% CGT discount​​. For individual Australian taxpayers, disposing of cryptocurrencies is considered a CGT event. This necessitates meticulous record-keeping and accurate reporting of any capital gains or losses.  Unfortunately, the ATO has taken an extremely narrow interpretation of the law, meaning that even routine trading actions such as staking are considered CGT events – spawning a burgeoning tertiary software industry to track crypto transactions.  

Income Tax: Certain crypto transactions, such as receiving a salary in crypto, selling NFTs, or staking, can be treated as income and taxed accordingly.  With staking, the additional coins you receive as a reward are treated as income at the time of receipt – which is a different tax altogether to the CGT applicable on the original staked amount. 

Airdrops: Airdrops are generally considered ordinary income at their fair market value on the date of receipt, except for initial allocation airdrops, which are not considered ordinary income upon receipt​.

Crypto Losses: Losses from crypto can be used to offset capital gains but cannot be deducted from other income​.

Comparison and Actionable Insights for Investors

Both Switzerland and Australia require the declaration of cryptocurrency holdings for tax purposes. However, their approaches differ significantly. Swiss cantons offer flexibility in cryptocurrency taxation, whereas Australia provides a uniform but more rigid framework.

Of course, you can ignore crypto altogether.  I think this would be a mistake – as I’ve previously argued, I think crypto should form a part of every investor’s portfolio.  Aside from the cryptocurrencies themselves, Blockchain technology continues to play an increasingly important role in traditional business operations.

For investors, these differences necessitate tailored strategies:

Navigating Swiss Taxation: Investors in Switzerland must understand the specific tax regulations in each canton, especially if they hold assets in cantons like Zug or Lugano, which have embraced cryptocurrency for tax payments.

Compliance in Australia: Australian investors should maintain accurate records of all cryptocurrency transactions due to the CGT implications and the ATO’s focus on compliance.

Exploring Opportunities: The Swiss model offers unique opportunities in cantons that support cryptocurrency, such as Zug and Lugano. Investors might explore these areas for potential tax advantages and to engage in a burgeoning crypto ecosystem.

Risk Assessment: The flexibility in the Swiss tax system comes with the need for thorough due diligence, especially regarding the tax implications in different cantons.

Strategic Planning: In Australia, investors should incorporate the CGT implications of cryptocurrencies into their long-term investment strategies.

Staying Informed: Regulations in both countries are dynamic. Staying updated with the latest developments is crucial for effective portfolio management and compliance.

Conclusion

An awareness of the differing tax treatments and regulatory regimes is especially useful in times of changing residency, as it allows for any necessary actions to be taken prior to the change.  Equally, the acceptance (or otherwise) by regulators in a given jurisdiction is a strong signal as to where cryptocurrencies are headed within the particular country.  On that front,  while each country has its strengths and weaknesses when it comes to the adaptation and regulation of cryptocurrency, at least we can be thankful for the clarity they each provide – even if some of the approaches are better suited to fiat and real property rather than digital assets.

More specifically, these differences again demonstrate the importance of specific advice for your individual circumstances.  I’d love to hear from you personally to see how my expertise can assist you.  I travel regularly between the two countries and have an extensive range of professional colleagues in the UK, EU, Middle East and the USA.   In Australia, I work with the leading firm The Wealth Designers.  If you would like to arrange a meeting to discuss your specific situation, you can contact me here.