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 Baptiste,
Thank you for sharing all this information.
Could you please confirm that gold ETFs capital gains are also not taxed for private investors.
So, in my case, if I am a EU citizen, not living or working in Switzerland. If I buy some Swiss gold ETFs and hold them for a long time, I have no taxes to pay in Switzerland.
Also could you confirm that in the above case I don’t have to get in contact/fill any paper with Swiss tax authorities.
Kind regards,
Traian
Hi,
In that case, you should indeed not have to pay taxes in Switzerland.
I am not an expert, but I am not aware of any contact you would have to do if you invest through a broker in Swiss ETFs or shares. In any case, your broker should prompt you for these.
Hello Mr Poor Swiss,
I love your blog, always very informative!
I have a question related to the above:
I follow your advice in investments and invest every year ~5 kCHF in a world ETF and that’s it (+ VIAC for 3rd pillar). That’s my only investing activity.
I currently have the opportunity to purchase RSU in a startup (that I am mentoring) at a very low price.
The Startup that is selling me those stocks believes that it will be worth billions in a few years, making my share of RSU worth a lot (~ 1 mCHF)
If that happens, and I sell my share for that much (fingers crossed :D ) , will I be considered as a professional investor? or will this be considered a capital gain and I will not be taxed on it?
Do you have any recommendations on how best to handle this scenario?
Thank you very much!
Hi John,
Thanks for your kind words :)
I am not sure. If you generate a 1M or more in capital gains, you would at least violate one of the criteria. This does not guarantee the taxes, but it seems to me that it would be very likely.
I would check with a tax advisor. But I don’t really see the issue. If you get 1M or 700K, you still got a good deal, no?
Hi Poor Swiss,
Thanks for this nice article. It is very informative. I have one question. So I understand the status private vs professional. Let us assume you have gains, then you pay 0% taxes as a private investor, and an income tax as a professional investor.
But what happens if someone has losses? Can you declare the losses and deduct from your taxable income (I guess up to some percent) or the losses is completely then on your part/fault? Talking about Switzerland always.
If you are a standard investor, you cannot declare losses either.
If you are a professional investor, you can declare losses and remove from your taxable income.
You cannot have both advantages :)
Do you think that selling covered call options would be a red flag of professional investing?
Hi P,
It would be a red flag indeed. However, that would not necessarily mean you are a professional investor. If you do a little for fun, it would be okay. But if you are doing it a lot for profits, that could be considered professional trading.
I started for first time this year. We are talking maybe 1k CHF per year max if I keep going. However, if it is going to complicate my taxes I could stop now & it would bring me like 200 CHF.
Hi P,
I would be very surprised if this was enough for the tax office to consider your case in detail.
You can always ask them in advance, they should know better than I do.
Would CFDs be a red flag? (with no leverage, X1). For example, if you are using etoro you can only buy some indexes and stocks as CFDs.
I am not sure, but I would think yes. In any case, I would not recommend trading in CFDs, this is too much gambling.
Hi Baptiste,
I am based in Zug and read the following rules to be defined as a private investor:
-Do not hold more than 200k
-less than 200 transactions
-transaction value less than 2x average value of portfolio
What are your comments on that?
Source:
(https://www.zg.ch/behoerden/finanzdirektion/steuerverwaltung/steuerbuch-zug/erlaeuterungen-zu-a7-17-selbstaendige-erwerbstaetigkeit/gerwerbsmaessiger-wertschriftenhandel/ausschluss-der-selbstaendigen-erwerbstaetigkeit)
Hi,
Indeed, cantons are allowed to be stricter than the general rules.
I still would not worry too much about it. Less than 200 transactions is easy to keep and transaction values is as well. They also say that the conditions must be clearly exceeded to be considered professional.
I don´t even know how to prove the average value of my portfolio:
All I get is a document with individual transactions and a quarterly state of my portfolio at the end of the quarter. None of these two can prove the average value of the portfolio over the year.
I suspect however I might be above the threshold of 200k
To get the average value, you add each end-of-quarter value together and you divide by 4 (or by 3 if you only have the last three quarters).
In any case, there is not much you can do about it. You can reduce the number of transactions you do. And also each year, it’s going to be simpler to abide by the rule regarding the volume of transactions.
Ans finally, you will be taxed on capital gains that only appear if you sell something. If you don’t sell, there is no risk for now.
Great article
How do you think crypto losses are treated in the case of a professional trader?
a) Can the losses be used to reduce taxable income of the family, when filing joint income tax return with the spouse?
b) Can the losses be carried forward to next year for offsetting any gains next year?
cheers,
Will
Hi Will,
I would think they are treated as capital gains. So for a) they should reduce taxable income as long as you are categorized as professional investor by the law (not by the job)
As for b) I don’t think so.
If you really want to be sure, your tax office should know this.
Thanks for the info. I would break the 50% rule but it’s just one so it should be ok. But I am not sure about the meaning of number 3. Does it mean that the investor cannot 5x his money without paying taxes? Second question – this seems like very vague way of distinguishing trader vs investor. I mean, you said ta office will decide which one they will consider me to be. I really don’t like such uncertainty. How does one go about it? Should I visit tax office before considering Switzerland to begin with?
Hi Glen,
Rule 3 means you cannot buy (or sell) for 5 times more than your portfolio. Let’s say you have 100K at the beginning of the year, you should not do transactions for more than 500K during the year.
If you want to be sure, you should indeed visit the tax office.
However, if you are a passive long-term investor investing without leverage in ETFs, you should really not worry too much about it with the current law.
Where can I find this third rule written down explicitely? I understand the common case. But I dont understand what happens the first year you start investing. Say, you have 100K of savings that you want to invest. Your portfolio at the begining of the year is 0 because you havent started investing at all. How do you invest and at what rate should you be investing without breaking rule 3? All the 100k at once? Divided into different tax years? Thanks in advance and sorry for the maybe stupid question.
Hi Daniel,
Unfortunately, the official CH website did a big rewrite and I cannot find my source anymore.
However, in your case, I believe that you would break rule 3. But they have to take into account a certain minimum. And then, I would not worry about it if you are not breaking any other rule as well.
I would still invest the 100K at once. If you do not sell, you have no capital gains, so you can’t be taxed.
Hi there, thank you for the useful hints.
I have recently moved to Switzerland and would like to enjoy the fiscal benefits that you describe. I have a couple of questions:
1) if I open a trading account with Interactive Brokers or other international platforms based abroad, am I still eligible for 0% capital gains taxes? Do these platforms pay taxes on my behalf in the country where they are based for the capital gains made there?
2) What about dividends made through these platforms, should they be declared in Switzerland or in the country where the relevant ETF is based?
I ask because so far I have invested through Moneyfarm, which is based in Italy and pays a 25% capital gain tax on my behalf there.
Thank you,
Marco
Hi Marco,
1) Yes, you are still eligible :) And no, they do not pay taxes on your behalf (at least in the U.S. or Europe, maybe some special countries are different).
2) All the dividends should be declared in the country you are paying taxes. However, some countries have dividend withholding. This withholding will be done at the source (the broker). So, in the case of U.S. ETFs, you will get 15% or 30% (more info) withhold from your dividends. I am guessing this is also what happens with Moneyfarm, but this is only a guess.
Hi,
At first – great website, great articles. Good job!
My question – what about forex traders (if it matters, in ZH canton)? If i would I would open in average 5-10 transactions monthly (and close them after max 1 month), what is the tax i would pay and from what?
Example: I make 10 transactions a month (120 in year) and each of them i close after 1 month exactly. 90 of them are profitable, let’s say capital gain from these 90 is 1000 chf, 30 were lose (all of them 200chf). How this should be taxed and moreover – the tax will be taken from 800 (as i lost 200chf) or from 1000 chf (profitable transactions only)?
Hi Mikolaj,
That’s a good question. Unfortunately, I do not know. For me, the same rules should apply. But you will have to ask your local tax office to be sure.
In any case, if you are generating little income compared to your main income, it’s very unlikely to be taxed. In essence, a professional investor is somebody that that derives a large portion of his income in capital gains.
In your example, if you are taxed on that (unlikely for small amounts), you should be taxed on the 800 CHF only.
Hi Swiss. I would like to know more about your experience declaring taxes in Switzerland. At the time of having a portfolio with different stocks /etf, in different currencies, do you have to convert everything into chf? in that case, where does you take the base currency conversion rate from?
You said in other post you relocated your portfolio into just two etf. Do you think that changing a portfolio by selling a group of stocks (less than 6 months of buying) and buying an etf instead with the sell money might create a tax problem?
great blog!
Hi,
It might create a problem, but it’s unlikely unless you are generating a ton of capital gains (higher than your income).
The ictax system will give you conversion rates at the exact dates for the tax declaration. This is what I have used so far.