Legal Basis
On 17 June 2019, the Federal Tax Administration (FTA) published its practice adjustments for VAT on supplies in connection with blockchain and distributed ledger technology. The FTA distinguishes between the following three main types of tokens:
- Payment Tokens serve no purpose other than the use as means of payment for the purchase of supplies and/or services from one or more service providers. Payment Tokens therefore do not entitle the holder to certain or determinable services, but merely represent the contractually agreed means of payment.
- Utility Tokens entitle the holder to certain or determinable services and/or grant the holder access rights to a platform, application or similar (licence or licence-like right).
- Asset Tokens entitle the holder to participate in earnings, turnover, profit, a certain part of earnings or turnover, derivative rights or the like. Asset Tokens are always based on a contractual legal relationship and therefore do not establish a corporate ownership relationship and do not entitle the holder to repayment of the amount originally paid in (i.e., no equity or debt).
In this regard, a separate but very relevant aspect needs to be considered: The Swiss financial market regulator FINMA uses the same terms for the regulatory token qualification (i.e., Payment, Utility and Asset Token), but the respective definitions are different. This leads to much confusion in practice. Please note that it is not possible to merely rely on the FINMA classification for VAT purposes. A separate analysis must be conducted.
However, in our opinion the categories discussed in the FTA’s practice are very narrowly defined, disregard some technical functionalities of decentralized ecosystems, and show large gaps. Fully decentralized Native Tokens or tokens with voucher, equity, debt, or investment fund characteristics are missing. Hence, there is still some uncertainty how the FTA might qualify a token in each individual case.
Trading of Tokens
Based on the above, the FTA qualifies the trading of tokens as follows:
- The use of Payment Tokens is generally treated in the same way as the use of means of payments. Hence, they do not constitute a separate supply of service and their sale is a mere exchange of cash. It is, therefore, an irrelevant transaction for VAT purposes. Professional trading of Payment Tokens in terms of a business activity, on the other hand, is exempt from VAT without credit (analogous to foreign exchange trading). The fees and commissions charged as well as the spread resulting from the buying or selling price is considered to be remuneration and thus turnover.
- The purchase and sale of Utility Tokens is a taxable supply, if the place of supply for the specific service represented by the token is deemed to be in Switzerland and no VAT exemption applies. The relevant turnover comprises the whole amount of the proceeds (i.e., the selling price of the token irrespective of whether price gains or losses were realized).
- The purchase and sale of Asset Tokens is exempt from VAT without credit. The relevant turnover comprises the whole amount of the proceeds (i.e., the selling price of the token irrespective of whether price gains or losses were realized).
Native Tokens
As many tokens represent a Native Token of an ecosystem, protocol or application (e.g. layer-1 protocol tokens such as ETH, XTZ or ADA), and therefore function as a factual registration, communication and settlement unit on the decentralized network, including gas and (potentially) staking, they do often not fit the above-mentioned definitions of the FTA.
Native Tokens are mostly qualified as Utility Tokens from a FINMA perspective. Hence, a classification as taxable Utility Tokens for VAT purposes cannot be excluded. However, as mentioned above, the definitions for regulatory and VAT purposes are not the same and, therefore, the respective qualifications might not mirror each other. As a result, tokens which are qualified as Utility Tokens from a FINMA perspective need to be additionally qualified according to the following VAT categories: (1) taxable supply of services, or (2) no supply at all.
Only if a specific service or at least clearly determinable future service is linked to the token (e.g. prepayment for a very defined service), it is considered a taxable Utility Token for VAT purposes. In this case, token sales to Swiss-based counterparties (i.e. clients and brokers) are subject to currently 7.7% Swiss VAT. In addition, also the buy-side has some potential VAT risks (i.e., taxable supply or acquisition tax).
On the other hand, undefined utilities are rather treated like non-taxable Vouchers of Value for VAT purposes. Their sale is considered to be a mere exchange of cash and is, in the absence of a supply for consideration, an irrelevant transaction for VAT purposes (i.e. no Swiss VAT).
As a result, it follows that if there is no specific or at least determinable future service, Native Tokens are treated similarly to (undefined) Vouchers of Value and follow the same logic as means of payments, resulting in an irrelevant transaction for VAT purposes. Swiss VAT is applicable to sales to Swiss-based counterparties, on the other hand, if the token is linked to such specific or determinable service.
Conclusion and Recommendations
In view of the above, we recommend to carefully examine which category the traded tokens can be assigned to and to consider the corresponding VAT implications. Thereby, the FINMA classification is not directly relevant. It is necessary to perform a separate analysis for VAT purposes.
In cases where a classification as Utility Token (according to VAT definition) cannot be excluded, we suggest examining in more detail whether there is a specific service or at least determinable future service which leads to a VAT relevant and taxable (pre-)payment. Based on the result of such analysis, no or 7.7% Swiss VAT might be applicable.
If the turnover with potential Utility Tokens (according to VAT definition) is considerably high, a tax ruling with the Federal VAT authorities is strongly recommended to get legal certainty.
We also recommend that the necessary processes within a trading facility are properly implemented before trading Utility Tokens (according to VAT definition) on a large scale.
Please let us know if you have any questions. We are happy to support you with setting up an appropriate token qualification procedure from a VAT perspective, or with any other legal, tax or compliance matters.
