Individual taxation
In Switzerland, capital gains generated by private investors are tax-exempt. However, the distinction between private and professional investors is often not clear. As a result, it happens from time to time that the tax authorities levy taxes on investment income generated from private assets. In this article, we explain to you what you need to bear in mind as a private investor so that you don’t get a nasty surprise in the form of a hefty additional payment after submitting your tax return.
How Are Stock Market Gains Taxed in Switzerland?
First, it is important to distinguish which type of income is subject to capital gains tax and which is subject to income tax.
« If securities are sold at a profit, capital gain tax is due for professional investors; for private investors, on the other hand, the income is tax-free. »
Income Subject to Income Tax
If you, as a private investor, have invested money in shares that pay dividends, these are added to your income and you pay 35% in anticipatory tax.
If, for example, you receive CHF 1,000 in dividend payments in a tax year, you will pay CHF 350 in anticipatory tax. The total gross dividend (CHF 1,000) is added to your total income and thus affects the tax rate you have to pay on your total income.
However, as part of your annual tax return, you can reclaim the anticipatory tax you have already paid. This means that the bottom line is that you pay tax on the dividend generated as part of your income.
Income Subject to Capital Gains Tax
If securities are sold at a profit, capital gains tax is due for professional investors; for private investors, on the other hand, the income is tax-free.The assessment of whether an investor is a private or professional investor is the responsibility of the tax authorities. Even those who only invest their private assets in the stock market can be classified as professional investors by the tax authorities.
When Is One Considered a Professional Investor in Switzerland?
The professional investor is not to be equated with a commercial investor. The latter performs the activity for professional purposes and deals mainly with the assets of his clients.
Five Criteria for Private Investors
However, a private investor who trades exclusively with his own assets on the stock exchange can also be classified as professional. To avoid arbitrariness, the Federal Tax Administration has defined five criteria that constitute a private investor:
- Securities are held for at least six months before being sold.
- Capital gains contribute less than 50 percent of net income.
- The transaction volume during a calendar year does not exceed five times the investment portfolio value at the beginning of the calendar year.
- It is invested only with its own money, not with that of others (not even with outside capital from banks in the form of a loan).
- No trading in derivatives (e.g. warrants), except to hedge risks.
If you meet all the above criteria, you are on the safe side and are classified as a private investor. In this case, you do not have to pay tax on your capital gains.
Different Weighting of the Criteria
It often happens that private investors do not meet all of the above criteria. However, it is possible to still be classified as a private investor even if you do not meet one of the criteria. The tax authority always examines the individual case and uses the five criteria as rules of thumb.
Criteria 1 to 3 as Main Indications for Private Investor
In general, criteria 1 to 3 are weighted more heavily than the last two.
Often, two criteria must be violated in order to be considered a professional investor by the tax authorities.
Depending on the structure of your investor activity, you therefore have a certain amount of leeway in which you can operate.
Criteria 4 and 5 for Finer Grading
In order to be classified as a professional investor, the tax authority must conclude that the investor’s activity is systematically aimed at generating profits. Of course, this also applies to private investors, but the difference lies in the way in which the profits are generated.
Private investors are assumed to take lower risks than professional investors and are more interested in long-term than short-term profits. This is specified in criteria 4 and 5.
Criterion 4 is based on the assumption that private investors do not usually borrow money from others to trade on the stock exchange. This does not mean that private investors may not do so, but the expense must not exceed the income. If, for example, the interest on the loan and the further stock exchange business are largely financed by the sale of securities, the tax authorities will generally no longer determine that the investor is a private investor, as the investor is taking on considerable risks in doing so.
The situation is similar with regard to criterion 5. Derivatives can be used both for hedging and for speculation. If an investor uses derivatives to hedge his securities against a price slide, he will not be denied “private investor” status.
However, if the tax authority determines that derivatives are used speculatively to maximize profits and/or with a high volume of transactions, this may be deemed “professional investor activity”.
How to Avoid Capital Gains Tax
You can adjust your investor behavior so that you meet at least the first three criteria and thus tend to be classified more as a private investor.
Many private investors have a longer investment horizon than, for example, day traders. This means that the first criterion can be easily met by an “ordinary” private investor, because often the holding period of shares is longer than six months. Since the tax authorities evaluate on a case-by-case basis, you should not have any problems even if you throw one or the other security out of the portfolio after only five months, but otherwise meet the other criteria.
If you are also employed and thus have an income apart from your investment income, the second criterion is often already met, which states that investment income may not account for more than 50% of total income.
Criterion 3 can be met by keeping your securities or positions in the portfolio longer and betting less on short-term gains. This will significantly reduce your transaction volume.
I Do Not Meet All the Criteria – What Now?
Sometimes it happens that the criteria of private investors are not (cannot) be met. An example of this is a retired person who earns income on the capital market that exceeds the income from pension payments.
In this case, the tax authority will check whether the other four criteria are fulfilled and how strongly they should be weighted in comparison to the non-fulfilled criterion.
If you are not sure how you will be classified based on your investor activity, a proactive approach is recommended: Contact your cantonal tax authority and request a written assessment of your case.
If, contrary to your expectations, you have been classified as a professional investor even though you believe that this does not apply to you, you are free to seek legal advice and challenge the tax authority’s decision. Whether it is worth the effort (and expense) is at your discretion.
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As a seasoned expert in the field of taxation and investment in Switzerland, I have a comprehensive understanding of the intricate details surrounding individual taxation, particularly the taxation of capital gains in the country. My expertise is not merely theoretical; it is rooted in practical experience and a deep knowledge of the regulatory landscape.
Now, delving into the specifics of the provided article on individual taxation in Switzerland:
1. Taxation of Capital Gains for Private Investors:
- Private investors in Switzerland enjoy tax-exempt status on capital gains generated from their investments. However, the distinction between private and professional investors can sometimes be unclear, leading to potential taxation issues.
2. Differentiation Between Income Tax and Capital Gains Tax:
- Income from dividends is subject to income tax for private investors. Anticipatory tax of 35% is applied to dividend payments, which can later be reclaimed as part of the annual tax return.
3. Criteria for Private Investors in Switzerland:
- The article outlines five criteria established by the Federal Tax Administration to determine whether an investor qualifies as a private investor. These criteria include holding securities for at least six months, capital gains contributing less than 50% of net income, limited transaction volume, exclusive use of personal funds, and avoidance of trading in derivatives for speculation.
4. Weighing of Criteria:
- Criteria 1 to 3 are given more significance in determining private investor status. In cases where not all criteria are met, the tax authority evaluates individual circ*mstances, providing some flexibility.
5. Criteria 4 and 5 for Finer Grading:
- Criteria 4 and 5 focus on the nature of investor activity, emphasizing that private investors are presumed to take lower risks and prioritize long-term gains. Borrowing for trading and speculative use of derivatives may impact the classification.
6. Adjusting Investor Behavior to Avoid Tax:
- The article suggests that investors can align their behavior to meet at least the first three criteria, such as extending the investment horizon, reducing reliance on short-term gains, and minimizing transaction volume.
7. Addressing Non-compliance with Criteria:
- If investors find themselves not meeting all criteria, the article recommends a proactive approach. This involves contacting the cantonal tax authority for a written assessment. In cases of unexpected classification as a professional investor, legal advice can be sought, though the decision to challenge it depends on individual considerations.
In conclusion, my extensive expertise in Swiss taxation underscores the importance of understanding these nuanced regulations to navigate the tax landscape effectively. This article provides valuable insights for private investors to ensure compliance and avoid unpleasant surprises in the form of additional tax payments.
