"Nugget"-Decision might impact tax treatment of certain Altcoins for Swiss investors

It is a widely accepted practice that crypto tokens such as Bitcoin or Ether are treated similar to other financial investments in the hands of Swiss individual investors. They are subject to wealth tax at fair market value but capital gains realised as part of a private investment are tax free.

A recent decision of the Zurich Administrative Court might challenge this view for certain altcoins.

The court decision

In the case at hand Swiss-resident individual derived a significant gain by selling “Nuggets”, a virtual currency used as part of an online game. He claimed that such gains should be treated as tax free capital gains since they were derived from an investment activity and not from gaming itself. The Zurich tax authorities challenged this view and qualified the gains as income from gaming. The appeals commission supported the tax payer in its initial decision dated 18 June 2019, stating that the tax payer had not exceeded the thresholds of private wealth management. The Zurich Administrative Court overthrew the commissions decision its its ruling dated 13 November 2019 with the following arguments:

  • The “Nuggets” where not freely tradable outside of the gaming platform
  • The price of the “Nuggets” was heavily manipulated by factors other than supply and demand, therefore the development of the price was more following the rules of the game, rather than an actual market.
  • Hence, the “Nuggets” should not be treated as financial assets. They are not subject to wealth tax until they are converted into an actual currency and all gains would be subject to income tax (either as gaming income or lottery income).

Consequences of Altcoins

To the extent Swiss investors own Altcoins that are not traded in a fully developed market, either because they are not listed or because the platform does not allow for a proper price building mechanism, there is a risk that the qualification as financial asset would be denied. It is recommended that investors seek clarity by pre-discussing the nature of their coins prior to realising a significant capital gain.

On type of tokens that needs to be carefully monitored are revenue sharing tokens that operate through a repurchase mechanism. Whilst investors technically realise capital gains when selling such tokens, the tax authorities could argue that the price increase was mainly driven by the repurchase program. For those type of tokens it seems particularly important to establish a proper market that allows secondary trading of the token rather than the investor waiting for the tokens to be repurchased at a higher value.