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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I came to know that if I invest in the Indian market , and then, at the time of sale, 10% taxes are deducted at source as capital gain taxes. As I’m resident in Switzeland, should I be able to get them reimbursed as Switzerland doesn’t have capital gain taxes?
Hi Jack,
I don’t know. This will depend on whether Switzerland and India has a double taxation treaty I think.
Hello.
thanks for the interesting post. I invest in US growth stocks and frequently use options to either hedge my portfolio, or to buy in and grow my positions.
I frequently outperform the SPX but never achieve 50% growth more than the starting account.
Would this also be considered as professional.
Hi,
In theory, using options to grow your portfolio (and not to hedge) could make you classified as a professional investor. In practice, you would likely need to meet several criteria before that hapens but a single criteria could be enough in some situations.
So, it will be up to the tax office to decide.
Hi Baptiste, thank you for blogging this interesting stuff. I am a german, living in germany, owning a swiss bank account with an attached broker. I am a dividend investor in germany already but want to open a swiss depot as well and the customer service is not very clear on the subject of taxation. So here´s my question to you:) Of course I will declare my dividends in my german tax declaration – but does the swiss bank transfer 35% of them to the “Eidgenössische Steuerverwaltung” as usual even if I am not subject to swiss taxation law? And do I have to get it back from the swiss authorities then? Sounds quite complicated and I fear it is… Thank you very much for your time and keep on the good stuff. Thomas
Hi Tom,
I am really not sure, this is outside of my field.
I would say that the end result is that you will not pay any Swiss tax. Now, depending on the Swiss boroker, you may indeed have to pay the 35% withholding and then claim it back.
But I can’t be sure. I have never been in this position.
Hi Baptiste, very good blog and interesting article. I have a bit of a stupid question: not an expert on this, I’ve started this year to invest with IB and I never have had to declare capital gains or got a document from IB so I don’t know how it works: in my case, looking at the rules, the only risky rule that I could potentially break is the volume of transactions during the year, I don’t intend to do day trading but maybe I would like to buy and sell my capital a few times between one ETF or stock and other, all wihout ‘exiting’ IB, as lokg as that doesnt make me a professional investor; but how does it work, how the Swiss authorities know how many times you bought or sold? Do IB share with them all the movements, or those appear in your statement? Do these intra-IB movements count or the only thing that counts is when you transfer it out of IB and back to your savings account?
Hi Alex
Normally, you should not have to pay capital gains indeed. Again, remember that you should probably break a few rules to be qualified as a proffesional investor.
However, you always need to declare your IB assets on your tax declaration because you have to pay taxes on dividends and wealth tax.
IB does not share anything, but you have to share everything. You have to declare all the buy and sell operations on your tax declaration.
Understood, yes, thinking about it, it makes sense that one has to give full details of the movements to explain all the losses, gains and dividends. Thanks!
Hi!
What about the 2-4% interest you receive from the cash held in a brokerage account for future investments? Is it also not liable for capital gain tax in CH? Thank you:
It’s not capital gain, it’s income. In that case, it will be taxed as income in Switzerland.
Hello, Can you tell me if non-resident (Canadian) investors have to pay CGT on Swiss stock market investments when they withdraw funds and if yes, what is the rate and do they have to pay up front or can the CGT come out of the profits. This is a very time-sensitive issue so I would appreciate an answer as soon as possible. Thank you, Anne
Hi Anne,
I am not sure I understand. But if you are in Canada, you should be subject to Canadian taxes, of which I have no idea about.
If you are Canadian, but living in Switzerland and solely eligibible to taxes in Switzerland, you should have the same rules as Swiss residents.
My partner is about to receive a large grant of stock options as he is being promoted to cro of the american company he works for-i was wondering if it makes any sense to move in a tax advantaged country before he received this grant or if the advantages of Switzerland are also valid at the moment in the future when he will be selling his stock. (Even though the stock options were granted when he lived in Spain)?
Hi Aud,
I am not sure. If that’s big enough of a grant, I would ask a professional tax advisor about it.
I have never received stock options, but I have received Restricted Stock Units that vest after a year. In that case, you don’t have taxes when you receive the “grant”, but when they vest. And this is counted as income. I would expect that to be the same for stock options. So, if we are talking about high 6 figures or more, it may be a large tax indeed. In that case, you could likely save money by moving if you can.
I have just sold a bunch of RSU that I received from my employer and that I held on for a few years.
This transaction alone was in the six figure range and definitely above my annual income.
Now I would like to invest this capital on ETF shares for long-term gains (something like 5 to 10 years).
Do you think this could cause the tax office to flag me as a professional investor?
Hi Balac,
I don’t think so. You have received the RSU over time and these should have been part of your income at this time. So, they are already counted and taxed. In that case, I would expect the capital gains to not be taxed.
Now, if you had not declared them before during the previous, it could be a red flag for the tax office, because you should have paid wealth tax on them. But I don’t think the capital gains will count.
Hi Baptiste,
I have always declared the RSU since the first year they started to vest, and also payed taxes on them when vested (twice actually, with some shares being held by the US broker – which I didn’t know I could get back by submitting the DA-1 form -, and on Switzerland on my monthly pay slip).
Thinking about it, you are probably right otherwise this would discourage people from holding onto their RSU and only selling them when the price is high, with the fear of getting flagged as professional investor.
Thank you for your answer, as I getting a bit worried I had made a mistake there! :)
Great article. Thank you so much! Quick question: how about capital gains on foreign exchange?
For example, I have a Premium Revolut account where I can exchange Swiss Franc to any currency (say, USD) and then I can exchange it back to Swiss Franc keeping the profit.
Does it count as capital gains or some other form of taxable income in Switzerland?
Thank you!
Hi
I am no expert in FOREX, but I think the same rules apply than on stocks.
I have a question for capital gains do not account for more than 50% of their net income.
You pointed out that this might violate the rule if one wants to retire early (living off dividends and gains). I guess in theory any income from the first, second, and third pillar would in theory account as net income, also?
Could you help me out understanding this point:
“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”.
Wouldn’t that mean investing a large sum (e.g., 100k so the entire portfolio of a bank account) within one calendar year on stock (without selling) could be a problem? Despite not making any gains and only getting dividends? Or does this mean one buys and sells (after 6 months) leading to a high transaction volume.
Lastly, is there any information on how much capital gains one has to pay if regarded as professional trader?
For your first point, you are correct, pensions would count toward income. But this would not help early retirement since early retirement is before any pension scheme.
It’s correct that if you start investing with 100K the first year, you will go from zero to 100K, so violating the rule. However, these rules are only interesting when you generate significant capital gains, so other points should be fine.
Finally, it’s simple, if you are a professional trader, capital gains are taxed as income (same rules as your salary).
Again: If you are not professionally trading, it’s extremely unlikely to be considered a professional trader.