The truth about Capital Gains and Taxes in Switzerland
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When you invest in the stock market, you expect capital gains. But you do not want to lose your hard-earned capital to taxes, right? So, Swiss investors need to know how Switzerland taxes capital gains.
Capital gains are something that many people do not understand correctly. And this is especially true when it comes to Capital Gains Taxes. I have received many questions regarding how Switzerland taxes capital gains. I am specifically talking about capital gains and the stock market.
So I decided it was time to dedicate an entire article to Capital Gains and Switzerland taxes them. It is not a very difficult subject. But it is an essential subject!
Hopefully, this will help more people understand how this works! Fortunately, we have a country where we can avoid taxes on capital gains, but the rules are unclear.
Capital Gains in the Stock Market
Capital Gains are the gains you make when you sell stocks at a price higher than the amount you bought.
For instance, you purchased ten ETF shares at 100 USD and sold them at 200 USD. As a result, you have realized 1000 USD capital gains (10 shares times 100 USD gain per share) in this example.
Capital gains are based on the appreciation of value. And they are only counted when you sell. So if you have not sold yet, you could say you have unrealized capital gains. But we are focused on realized (sold) capital gains.
In this article, I mainly talk about stocks. But the same rules apply to bonds. There is no difference in capital gains between stocks and bonds.
Capital gains do not only apply to the stock market. They also apply to everything that appreciates. The other important area is real estate. Theoretically, you could even have capital gains when you sell anything at a higher price than when you bought it. However, for this article’s sake, we will focus on capital gains in the stock market.
Capital Gains Tax
Most countries have taxes on capital gains. So it means you need to consider this tax when you invest.
However, in Switzerland, capital gains are generally tax-free. Investing in the stock market in stocks or ETFs is very efficient. You can double your money without paying taxes on it.
This appreciation will still increase your wealth tax. But it means that income through capital gains is one of the only forms of income that will not be taxed twice in Switzerland.
Not having to pay taxes on capital gains can make it much easier to retire early in Switzerland. Most countries will tax your capital gains. And in some countries, capital gains tax is very high. For instance, in France, you will pay a third of your capital gains as taxes! In Russia, you would pay 20% in taxes. But in our great country, you generally pay 0% in capital gains tax!
You can read more about this on the official website of Switzerland. The website states that gains in the value of privately owned shares and bonds are tax-free if the investor is not classified as a professional investor.
Indeed, I said that capital gains are generally not taxed in Switzerland. Indeed, by default, they are tax-free. But if you qualify as a professional investor, you must pay a tax on your capital gains (counted as income). In that case, your capital gains will be added to your taxable income and taxed.
Professional Investor status
Tax offices consider people to be private investors by default. A private investor invests the money he is earning through other sources of income in the stock market. This means he is not living from his investments; he is simply using the stock market to make more money.
The federal tax office uses five different criteria for differentiating private investors and professional investors:
- Private investors should hold securities for at least six months before selling them.
- Capital gains of private investors do not account for more than 50 percent of their net income.
- The total volume of transactions (purchases and sales) of a private investor does not account for more than five times the value of the investment portfolio at the beginning of the tax period.
- Private investors invest with their own money, not with loans.
- Private investors do not use derivatives (especially options) unless they are for hedging the risks on their securities.
If you pass all these criteria as a private investor, your capital gains will not be taxed. On the other hand, if an investor does not pass all these rules, he may be considered a professional investor.
When you fail all the rules, tax offices do a thorough review to decide whether they are professional investors or not. An investor will likely be a professional investor when failing all these criteria.
If someone ticks only some rules, the local tax office will decide whether they are professional investors. In practice, you must violate at least two of these rules to be considered a professional investor.
Local tax offices use these criteria as rules of thumb. It means that tax offices can use their own rules. But generally, they use these five or a subset of these rules. The first three rules are the most important to tick.
The third rule is straightforward to avoid: hold your securities and do not try to time the market. If you invest passively in a few ETFs, the total transaction volume will always be much less than five times the value of your securities.
The first rule should also be easy. If you are a long-term investor, for instance, pursuing Financial Independence, you want to buy your shares with the intent to sell them for a very long time. So, you should have no issues with this rule.
The second rule is generally not bad. When you are working, you will likely get significantly more income than your capital gains. Therefore, your capital gains will not be taxed.
If you do not meet one of these rules, you will not be considered a professional investor. Ultimately, a human will still decide on your status.
For instance, if you held some of your securities for only five months, but all the other rules are fine, you will not be considered a professional investor. Or, if you invest more than five times your portfolio in a year but generate minimal capital gains, you will not be considered as such either.
It is also important to remember that few people are considered professional investors in Switzerland. This means you need to trade a lot to be considered as such. I am not saying you should not be careful. But I am saying the risks are minimal as long as you are a passive investor.
Since every canton can work around these five rules, you may want to contact your local tax office if unsure of your status.
But this may be different if you are trying to become Financially Independent and live out of the stock market.
Are FI People Professional Investors?
When you are Financially Independent and retired, you will not have much income. You may even have zero income for a long time. It means you will live out of your capital gains. But you do not want them to be taxed.
But since your capital gains make for more than half of your income, should you be considered a professional investor?
In theory, you could, yes. But in practice, you will only have one failed criterion. Generally, people are not considered professional investors only by a single criterion. You should meet several of these criteria for your capital gains to be taxed. Again, you can contact your local tax office if you want to be sure about that.
And there is something else as well: dividends. If you invest in the global stock market, you will receive dividends. Dividends are counted as income. So if you live half on your dividends and half on your capital gains, you should be fine.
In general, most ETFs have about a 2% dividend rate. Since most people retire on the four percent rule, they only need 2% of capital gains. This is a good split. But this can vary significantly yearly, so we must be careful.
Now, this is one place where distributing ETFs are much better than accumulating ETFs. If you only own accumulating ETFs, you will need to sell more of them to pay your bills. As such, you will generate more capital gains. Realized income is why I prefer distributing ETFs over accumulating ETFs.
Also, even if you sell 2% of your net assets yearly to live, this will not be entirely capital gains. Some of the money you get is the money you paid to buy the shares. But over the long-term, you want capital gains, not invested money. But still, this will reduce the risk of having too much income from capital gains.
When you are in retirement, a little income will go a long way in helping you retire. So, if some income stream covers a quarter of your expenses, you only need dividends and capital gains for the other three quarters. In that case, it is improbable that your capital gains exceed your dividends and the side income.
And if you use a more conservative withdrawal rate, it will be even easier to have half of your income in dividends.
Finally, there is something good with capital gains. You can control them. It means you decide when you gain capital gains. So, based on the 50/50 split, you can control how much capital gains you realize not to be considered a professional investor. Of course, this is not always possible. If you need the money for essential expenses, this should not prevent you from selling.
Given all this, early retirees in Switzerland do not have to worry much about capital gains tax. If you want to be sure, contact your local tax office. But in practice, it is extremely rare for people to be classified as professional investors unless they are self-employed traders.
Conclusion
We can assume that capital gains will not be taxed in Switzerland. It is excellent because this means much of your income will not be taxed in retirement.
Now, we still have to be careful not to be qualified as professional investors. Indeed, professional investors will have their capital gains taxed as income. But most rules are simply the rules of long-term passive investors (hold for more than six months and do not do many transactions).
The only thing that could happen is to be qualified as a professional investor in retirement because our capital gains make for more than half of our income. But in practice, this should not happen. Indeed, you should also receive dividends. And you may have a side income that will help in that matter.
Moreover, very few people are classified as professional investors. Unless you are day-trading, making many transactions, or using options to trade, you should not worry much about your investor status.
Too many people are worried about capital gains taxes. Most people should not worry about that because they will not fall into the category of professional investors. Hopefully, this article helps clarify capital gains and taxes in Switzerland.
If you are interested in capital gains, you are likely interested in the best brokers for Swiss investors.
If you want more tax information, I have an entire article about taxes in Switzerland. For instance, we should not forget that our wealth is taxed.
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Hello Mr. The Poor Swiss,
Thank you for the article.
I saw all those points about professional and private traders.
My case is a bit complicated because of adding cash during March-April (so amount at the beginning of the year is different than was later), holding some shares for longer time and I had 3 positions which I bought and sold within 1 week – gain of 5k approx in total (and re-invested to purchasing of other shares).
My questions therefore are:
– I’m situated in Aargau kanton, so do I need to contact tax office in Aargau for further details at the end of year with tax report from my broker? (considering also that 1 of my not yet realized profits is much higher than my yearly net income)
– I didn’t find anywhere some direct information about the tax % in a case I would be considered as a professional trader. What would be the tax amount from my gains in such case if I would close my position?How many % of gains do they take?
Thank you.
Jan
Hi Jan,
1) If you only realized about 5K in capital gains, I do not think you will qualify as a professional investor. And unrealized capital gains do not count. But if you were to realize it entirely in one year, it could be an issue indeed. Although, you would still have to tick the other criteria.
2) For professional investors, capital gains will be taxed as income. So the rate will depend on the same things as your income.
Thanks for stopping by!
Hello,
Thank you very much for your post, really helpful.
I would like to ask you about the dividends payments in IB. How does it work there? I have received some dividends and when I did my calculations, they deducted less than 35% so I am quite confused. Is it the dividend tax from US?
Thanks in advance.
Regards!
Hi Alex,
It depends on where does the ETF (or shares) comes from. If it’s an U.S. ETF, you will get 15% dividends withheld if you have filled a W8-BEN or 30% if you haven’t (and you should!).
How much was removed?
Thanks for stopping by!
Hello,
Posts like this are exactly the content I am personally interested for. I am using your website as a guide for my financial decisions and having documented the particularities of the Swiss system is very helpful.
I know that’s canton dependent and perhaps straightforward for most people, but I would be interested to see a tax declaration guide especially for the investments that are presented here.
Thank you for the info you are providing us!
Hi Soc,
Thanks for the kind words, I am glad this is useful :)
I have a guide on taxes if you are interested. It’s global so it won’t help directly with your tax declaration software.
I will maybe do a guide on Fritax, the tool for Fribourg, but the audience is a bit limited.
Thanks for stopping by!
Thanks for the article, you didn’t mention what is the tax rate for professional investors from capital gains though. Can you please advise? Thanks!
Hi Jaros,
That’s a good point. In my head, it was so clear that I did not think of including it in the article.
Capital gains are directly added to your taxable income. So how much you pay will depend on all the information on your tax declaration.
Thanks for stopping by!
Ouch! I’ve finally understood your point!
My interpretation of the rule is an “ex-ante” interpretation:
the taxman software calculates the “net income” (WITHOUT the realized capital gains),
it computes the ratio between the realized capital gains and the net income,
if the ratio is higher then 50%, then it turns the yellow light on.
Your interpretation of the rule is an “ex-post” interpretation:
the taxman software calculates the “net income” (WITHOUT the realized capital gains),
it provisionally adds the realized capital gains to the net income,
it computes the ratio between realized capital gains and the “provisionally adjusted” net income,
if the ratio is higher than 50%, then it turns the yellow light on,
if the ratio is lower than 50%, then it removes the realized capital gains from the “provisionally adjusted” net income.
I agree that also your interpretation is possible (normally I go with the simplest solution, I am a fan of Mr. Occam).
Once more it would be nice to know which cantons are adopting the “ex-ante” interpretation and which ones the “ex-post” interpretation.
I would gladly pay a few buck more of income tax if being “more certain” that my realized capital gains won’t be taxed.
The best solution would be of course a clearer law that would avoid boring discussions like this one.
Ciao!
Gino Pilotino
Hi Gino,
Yes, we have different interpretations of when it starts to matter. But I believe that both interpretations are correct. You explained both very well!
I did not realize before you talked about this that my interpretation was not the only one.
Unfortunately, I do not know which states are using which interpretation or even if they are able to use both or is there only one that makes sense from a taxable point of view.
Thanks for stopping by and detailing your thoughts!
That was the post I had been waiting for! I knew it was not difficult, had just no idea where to find the relevant information. You did for us in this admirably succinct and precise article, merci beaucoup!
Hi Greg,
I am glad you liked this post!
Let me know if there are other posts you are waiting for ;)
Thanks for stopping by!
Hello!
I partially disagree with what you wrote.
In order to be 100% on the safe side, one should have a 66% (taxed) income from dividends and a 33% (tax-free) income from capital gains, so that the capital gains (33%) would not exceed 50% of the taxed income (50% of 66%).
On the other hand, if we consider the statistics, <100 taxpayers were considered professional traders in a 5-year-period in canton Zurich:
<100 taxpayers/ 5 years / 1.5M = <0.0013%
IMHO only pathological cases (i.e. heavy day-traders) are being targeted by the tax office (in canton Zurich).
It would be nice to get similar statistics from other cantons as well; I do suspect that the local interpretation of the capital gain rules could change the fiscal attractiveness of many cantons as one would easily pay a slightly higher income tax, if he is reasonably sure not to be classified as a professional investor.
Source:
"Im Kanton Zürich waren es nach Angaben der Finanzdirektion in den vergangenen fünf Jahren weniger als hundert Fälle."
https://www.nzz.ch/finanzen/die-wahrheit-gibt-es-nur-vor-gericht-wenn-das-private-traden-boese-steuerfolgen-hat-ld.1302823
Ciao!
Gino Pilotino
Hi Gino,
Are you are sure about that? The law mentions that the revenue in capital gains should not outweigh 50% of the net income. But it is not clear whether the capital gains themselves are in the net income or not.
I am basing my analysis on this: https://www.estv.admin.ch/dam/estv/fr/dokumente/bundessteuer/kreisschreiben/2004/1-036-D-2012.pdf.download.pdf/1-036-D-2012-f.pdf
But then, I agree that it is extremely rare for this to be applied. I will emphasize this more in the article! It is very unlikely that a FI person would be considered a professional investor.
Thanks for stopping by!
Hello!
(I don’t speak very good French)
In the French version of the document you posted the key term is “revenu net”.
“C’est normalement le cas lorsque les gains en capital réalisés représentent moins de 50 % du revenu net de la période fiscale considérée.”
In the German version of the document “revenu net” becomes “Reineinkommen”; now, if I search for the term “Reineinkommen” in my tax declaration, I find a SPECIFIC LINE which does NOT contain the realized capital gains.
In my case it is line 350:
https://www.steueramt.zh.ch/internet/finanzdirektion/ksta/de/steuererklaerung/formulare-merkblaetter/_jcr_content/contentPar/form_2/formitems/steuererkl_rung_2016/download.spooler.download.1576766932031.pdf/300+STE+ZH+2019+HA+DEF.pdf
I believe that the guy at the tax office (or better the SW he is using) will compute the ratio between the capital gains realized in the reported tax year and the value indicated in the “Reineinkommen” line of the tax declaration. If the result of the calculation is more than 50%, then a light yellow (not intense red) light will appear on his screen.
Ciao!
Gino Pilotino
Hi,
Very interesting post!
I was wondering if you could explain a little bit more rule #3. For example, if at the beginning of the year the value of the investment portfolio is 1000 CHF does that mean that you can only invest up to 5000 CHF for the entire year?
Thank you so much!
Hi Mattia,
For rule 3, you can do the math at the end of the year :)
If you start the year with 1000, invest 5000 and end up with 7000 (with capital gains), your transaction volume will be only 5/7 of your net worth.
This rule should be fine for everybody. If you have an investment portfolio of 100K, you would need to do 500K of transactions during the year to violate this rule.
Thanks for stopping by :)
Thank you for your reply, I am still quite confused by this rule.
I have looked online and I have found this definition: “The transaction volume (sum of all purchase prices and sale incomes) per calendar year amount to a total of not more than five times the securities portfolio and credit balance at the beginning of the tax period”.
Isn’t the beginning of the tax period the start of the calendar year? Wouldn’t that be too strict for everyone especially at the beginning of an investment plan?
How is the transaction volume calculated? If I understand correctly your example above, if I had to sell my shares (after holding them for more than 6 months) for a total of 6.000 CHF I would end up with a transaction volume of 11.000 CHF (Bought for 5K and sold them for 6K). This volume would be higher than my portfolio at the start of the period (1.000 CHF) and and the end of the period (1.000 CHF), exceeding the limit set by the rule.
I have tried reading the circular 36 (27.07.2012) and it is still not clear to me if it is possible that the rule is so strict.
Thank you so much for your help on this!
Hi Mattia,
It seems you are right about the law. I checked it again and it seems I have missed the “beginning of tax year” part. And it is indeed the beginning of the year.
So, yes, this rule is quite strict. And yes, in your example, this rule is violated.
Now, if you have 1000 CHF and you invest 5000 CHF more and you are still working, there is zero chance for you to be considered a professional investor.
Just violating one of the rules does not make you a professional investor directly. If you violate them all (or likely, the first three), you will be considered a professional investor.
In your example (is it your case), I really would not worry. This is play money for the taxes.
Thanks for stopping by!
Thank you so much for the taking the time to reply, this is really helpful!
hi,
i have a question. when you get paid the dividends by degiro they only payout 65%. how do i get the 35% or how do i have to declare this when i do my taxes?
i just started this year with investing on degiro. do i get something from them for my taxes at the end of the year/ beginning next year?
thank you for your content
Hi Mikey,
This 35% is withheld for your taxes. You can see this as already paid taxes. You will have to declare the dividends on your tax declaration and this will be accounted for.
Yes, DEGIRO will send you an annual report each year.
Thanks for stopping by!
I was just about this a couple of days ago. Thanks for answering Mr TPS!
Hi Miro,
Glad to be able to help :)
I was asked this many times, so I thought it would be better to have a post about this once and for all :)
Thanks for stopping by!