How should staking be correctly classified for VAT purposes? The practice of the Swiss Federal Tax Administration (FTA) in this area is still in its early stages – but it is evolving. The statements made so far remain selective and only partially reflect the diversity of digital business models.
Starting Point: FTA VAT Info 04
In VAT Info 04 (section 2.7.3.5) of June 2019, the FTA expressed its initial position on the taxation of blockchain-related services. It stated:
Transaction fees paid by users to validators constitute a taxable supply. Such supplies are regarded as electronic services and are subject to VAT at the standard rate (art. 18 para. 1 in conjunction with art. 8 para. 1 VAT Act).
Block rewards, however, lack an identifiable counterparty which expends consideration. Consequently, there is no taxable supply; the block reward is deemed non-consideration (art. 18 para. 2 VAT Act)
In addition, a taxable supply is also assumed in cases of pool mining, pool staking, or node operation, provided that users transfer computing power or staking tokens and receive remuneration in return. The place of supply in these cases is likewise determined under art. 8 para. 1 VAT Act.
Further Clarifications in Practice
In ruling requests, the FTA has assessed certain staking models in a more differentiated manner – particularly with respect to delegation, representation, and remuneration structures. However, a consolidated and publicly accessible administrative practice has not yet been established.
Case Law: Decision of the Federal Administrative Court (A-5638/2022)
The court confirmed that, where both block rewards and transaction fees are involved, two separate supplies may exist. While the transaction fee constitutes taxable consideration between the user and the validator, the block reward remains non-consideration if the protocol does not constitute an identifiable counterparty.
Practical Outlook
The VAT classification of staking continues to depend on the specific facts of each case. Depending on the model – e.g. solo-staking, delegated staking, or liquid staking – the VAT implications may vary.
Key determining factors include:
the existence of a supply relationship,
the contractual roles of the parties involved, and
the allocation of income.
Solo-staking / Validation
In solo-staking a node is operated in one's own name in order to participate in the consensus mechanism as a validator. As remuneration for its validation activity, the validator receives staking rewards in the form of newly created tokens and transaction fees spent by users.
Transaction fees paid by the user to the validator for processing a specific transaction via the network qualify as remuneration for a taxable service, subject to the place of recipient principle (art. 8 para. 1 VAT Act).
Due to the anonymity of the participants, the FTA allows an approximate determination of the domestic share based on the proportion of nodes with domestic (CH and FL) IP addresses or, alternatively, based on the proportion of domestic (CH and FL) GDP in relation to global GDP. The ratio must generally be determined on a monthly basis and the chosen method must be maintained for a whole tax period.
Block rewards distributed by the protocol do not constitute remuneration for VAT purposes, if the protocol does not constitute an identifiable counterparty.
However, if the protocol is controlled by a decentralized autonomous organization (DAO) (i.e., token holders have the power of disposal by means of a qualified governance function), block rewards nevertheless represent remuneration for a taxable service to the protocol (block validation).
This also applies to protocols in which the validator is not specifically compensated for the block it validates, but is rewarded by the protocol at the end of a certain period of time (e.g., epoch) for its general participation as a validator in the system, and the transaction fees consequently flow to the protocol/network.
In order to determine the domicile of the DAO, the token distribution is generally used as a basis, in analogy to VAT Info 06, section 2.1. Consequently, decentralized groups of persons without legal personality are generally considered to be entities based abroad, as more than half of the tokens are usually held by persons based abroad. Accordingly, the respective block rewards are not subject to Swiss VAT.
Delegated staking
Token holders who do not wish to participate in the consensus mechanism as validators themselves can delegate the staking function (if provided for by the protocol) to validators of their choice.
Such on-chain delegation of the staking function constitutes a generally taxable service provided by the token holder to the validator, subject to the place of recipient principle (art. 8 para. 1 VAT Act).
In contrast to the large number of clients for transactions within the scope of the validator's activities, delegation is usually made to a more manageable number of validators.
An approximate determination of a domestic share based on domestic nodes or GDP is therefore not permissible for delegated staking services. The delegator must therefore prove the validator's place of business or, if this is not possible due to anonymity, verify it by means of the validator's IP address or other characteristics.
If the custodian acts on behalf of and for the account of the token holder, the staking service is generally attributable directly to the token holder and not to the custodian (direct representation).
In the case of non-segregated or pooled custody of tokens, it can be assumed that the custodian always acts in its own name in the context of staking and that there is therefore no direct representation. Accordingly, there are two separate supply relationships, i.e. a delegation from the token holder to the custodian, and a sub-delegation from the custodian to the validator (indirect representation). Any fees charged by the custodian for the delegation qualify as a reduction of consideration.
Staking-as-a-Service (SaaS)
If a service provider operates a validator node on behalf of and in the name (and for the account) of the customer (token holder), this (SaaS contract) is generally a taxable service subject to the place of recipient principle (art. 8 para. 1 VAT Act).
The staking activity in the blockchain network is attributed to the token holder, and the VAT treatment depends on the type of staking provided on behalf of the token holder (e.g., solo-staking or delegated staking).
Liquid staking
In liquid staking, the tokens to be staked are usually transferred into a smart contract and, in return, a new liquid token is issued to the liquid staker, which represents the share (stake) in the staking-pool and can be traded.
In academic literature, it is argued that liquid staking gives rise to a situation comparable to co-ownership and should therefore have the same VAT implications as solo-staking or delegated staking.
The FTA, on the other hand, considers it appropriate from an economic perspective to treat the liquid token for VAT purposes in analogy to a tracker certificate with a reference value in the staking-pool, or to a profit-participating bond (assuming that the liquid token is not associated with any qualified governance function).
For VAT purposes, the liquid token acquired in this way is therefore qualified as asset token. The trading of liquid staking tokens is thus exempt from VAT in accordance with art. 21 para. 2 no. 19 let. e VAT Act.
In this regard the contribution of tokens to receive the liquid token does not in principle constitute a supply relationship.
When the liquid token is returned in exchange for the collection of tokens from the staking-pool, the VAT exempt remuneration (interest) is calculated based on the amount paid out from the staking pool, less the number of tokens originally given to receive the liquid token.
If it is not possible to prove how much tokens were originally given when the liquid token is returned, the entire amount can be treated as VAT exempt remuneration for the sake of simplification.
If liquid staking is an ancillary activity, the input tax correction for the mixed-use of infrastructure can be made using the flat rate of 0.02% (VAT Info 09, section 4.3.2). Input tax directly attributable to this activity is not covered by this flat rate.
Re-staking
In re-staking, tokens that have already been staked are used to simultaneously secure decentralized applications (known as modules) via smart contracts. Here, too, there are options for solo-staking and delegated staking.
For VAT purposes, in principle no distinction is made between staking and re-staking. Reference can therefore be made to the explanations regarding solo-staking and delegated staking.
Outlook
As the different forms of staking show, the FTA’s practice publication which has remained unchanged since 2019 still leaves many questions unanswered. An update reflecting practical developments would therefore be welcome.
In the meantime, companies active in the staking area are advised to carefully assess the VAT implications and, where appropriate, seek a tax ruling or obtain professional advice.
Do you have questions about a particular staking setup or would you like a thorough assessment of your structure? We would be pleased to assist you.
