Hardly a day goes by without a major news story related to the opportunities and risks associated with the use of cryptocurrencies and Tokens issued through ICOs. However, these new means of financing present a regulatory challenge as well as raising very specific questions with regard to taxation. Governmental entities and regulatory bodies now face the task of producing guidelines and establishing their legal practice relating to this “Brave New Fintech World”.
Two weeks ago, the Swiss financial services regulator FINMA published its latest ICO guidelines. Furthermore, the International Fiscal Association (IFA) recently held a meeting in Basel where – besides others – the Swiss Federal Tax Administration (“FTA”) presented their assessment of certain Swiss federal tax aspects of ICOs and related Token models.
The presentation of the FTA, and supported by the statements of the FINMA, made it very clear that Tokens could classify as taxable securities for Swiss Stamp Transfer Tax (“SSTT”) purposes. More specifically, the FINMA has classified Tokens into four categories:
|Payment Tokens||Utility Tokens||Asset Tokens||Hybrid Tokens|
|Tokens used as a means of payment that do not give rise to claims on their issuer; a prominent example is Bitcon.||These tokens typically provide (future) access to a platform that offers blockchain based infrastructure.||Usually represent assets such as a debt or equity claims on the issuer; for example, an Asset Token could entitle its holder to a share in the company’s future earnings, capital or turnover flows etc.||Asset and Utility Tokens could also be classified as payment tokens. The individual Token classfications are not mutually exclusive.|
Are Tokens taxable securities for SSTT purposes?
Traditionally, taxable securities for SSTT purposes are bankable assets like shares, bonds and investment fund units/shares. In addition, certain structured products reflecting the performance of shares, bonds or investment funds are also treated as taxable securities for SSTT purposes.
Based on this definition, Payment Tokens clearly do not qualify as taxable securities for SSTT purposes. Asset Tokens that are standardised and suitable for mass trading tend to classify as share-like or bond-like financial instruments for Swiss tax purposes; therefore, they could classify as taxable securities (“Qualifying Tokens”) according to the FTA.
Standardised and tradeable Utility Tokens and consequently Hybrid Tokens that include elements of Asset Tokens might also classify as share-like or bond-like instruments for Swiss tax purposes. Thus, it is not excluded that suchTokens could classify as taxable security for SSTT purposes.
It is important to note that despite these guidelines there is no uniform classification rule for Tokens (yet), so a case by case analysis is always necessary.
A SSTT liability arises if
- a Swiss securities dealer within the meaning of SSTT legislation (“SSTT Dealer”) acts as
- an (a) intermediary or (b) counterparty in
- the transfer other than by way of a gift of
- taxable securities (e.g. Qualifying Tokens) and
- no exemption applies.
The tax rate ranges between 7.5 base points and 30 base points.
Typical SSTT Dealers are Swiss banks, traders, broker/dealers, asset managers and Swiss companies holding CHF 10 million taxable securities (e.g. shares of subsidiaries) as assets.
In addition, Swiss platforms offering trading/exchange of Qualifying Tokens very likely also classify as SSTT Dealers, in particular if these platforms are subject to FINMA Regulation.
SSTT Treatment of Standard ICO Transactions:
Primary market transactions (e.g. initial ICO of Qualifying Tokens) are SSTT-exempt.
Assuming a SSTT Dealer is involved as intermediary or counterparty, a subsequent additional Qualifying Token issuance is only SSTT-exempt if it is possible to distinguish between existing Tokens and newly issued additional Tokens.
Secondary market transactions in Qualifying Tokens via a SSTT Dealer (e.g. a FINMA-regulated Swiss platform offering trading/exchange of Qualifying Tokens) are generally subject to SSTT unless an exemption applies (e.g. exempt counterparty). Typical exempt counterparties are banks and traders holding the tokens for trading purposes, investment funds and foreign institutional investors. Swiss and foreign individuals do not qualify as SSTT-exempt investors.
Redemptions (e.g. “burning” of Qualifying Tokens) are SSTT-exempt provided that they are properly structured and documented).
The SSTT Dealer involved in the transaction as counterparty or intermediary is liable to account for and pay the SSTT to the FTA; in practice, the SSTT is charged back to the client.
Tokens (and in particular Asset Tokens) may classify as taxable securities (i.e. Qualifying Tokens) for SSTT purposes. Due to this, it is necessary to properly assess Tokens prior to making an ICO so that a proper structure can be implemented in order to manage potential SSTT costs for both the ICO and subsequent exchange.
Furthermore, Swiss platforms subject to FINMA regulation offering Qualifying Token trading/exchange should check in detail whether they classify as SSTT Dealers and – if they do – follow the required steps such as registration with the FTA as SSTT Dealer, establishing the so-called SSTT register, and account for and pay SSTT to the FTA.
As previously mentioned, each new ICO must be assessed individually due to the current lack of a uniform classification of Tokens. To paraphrase that famous Swiss saying about the regional variability of legal practice: “It varies from Token to Token”.