Capital gains tax strategy (reset cost basis)

Hi all,

Some private investors may be considered profesional investors and thus, taxed on capital gains, based on different criteria:

  1. Securities are held for at least six months before being sold.
  2. Capital gains contribute less than 50 percent of net income.
  3. The transaction volume during a calendar year does not exceed five times the investment portfolio value at the beginning of the calendar year.
  4. It is invested only with its own money, not with that of others (not even with outside capital from banks in the form of a loan).
  5. No trading in derivatives (e.g. warrants), except to hedge risks.

However, if you are a long term, buy & hold investor, after many years without selling, amount invested might become material, and if everything is sold at once, and capital gains realized at once, one might be considered as professional based on point 2.

Let’s look at one example:

CHF 102k invested in a stock: 6000 shares bought at CHF 17 at beg of year 1.

End of Year 1: share price = CHF 20
End of Year 2: share price = CHF 23
End of Year 3: share price = CHF 26
End of Year 4: share price = CHF 29
End of Year 5: share price = CHF 32
End of Year 6: share price = CHF 35
End of Year 7: share price = CHF 38
End of Year 8: share price = CHF 41
End of Year 9: share price = CHF 44
End of Year 10: share price = CHF 50

All shares sold at the end of year 10 for CHF 300k, realizing a capital gain of almost CHF 200k.

Assume an annual income of CHF 150k from work. Capital gains at year 10 are way higher than annual income, so there is a risk of being considered professional investor, and pay capital gains taxes on CHF 200k.

Does it make sense to reset the cost basis each year, meaning selling all shares at the end of the each year and buy them back again at the beginning of the next one, this way realizing smaller capital gains each year which are lower than 50% of annual income from work to avoid the risk of being considered a professional investor?

(Assuming small transactional fees to be paid to broker).

Thanks!

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This was discussed many times, you can search the forum. Not fitting the criteria doesn’t mean you become classified as professional. If the gain was over many years there’s no way it suddenly becomes professional because of the cost basis.

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What’s more there is a possibility that it doesn’t reset the cost basis, because the sale and the rebuy are not economically real.

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To the contrary, “long term buy(ing) & hold(ing)” is in fact a rather strong indication that you are not a professional investor but just managing personal wealth.

If anything, this trading pattern will only make you more likely to be considered a professional investor.

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In general the topic of being considered a professional trader is over estimated by members of the forum: I trade options, use margin, have a background in finance but this is not my main source of income so as long as you have a job to justify the money you are able to save this is not a topic. The starting point in 99% of the cases will be an increase in your taxable wealth from one year to the other that cannot be explained by the sole income you declared. If you sell some shares that you held for 10 years there’s nothing to fear even if the capital gains in that year are more than your income as long as you declared that you held the shares over the years. If not any successful entrepreneur would then have to pay taxes upon exit, which is not the case.

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Why would that be any different ? If you hold shares for 10 years you are surely not a professional trader. A professional trader in their mind is someone doing day trading, playing with leverage and derivatives and whose income rely on his trading gains. If your profile is not the latter you have nothing to worry about.

Also keep in mind that you are not required to send your individual trades with the tax return, only the value of your holdings at end of year and any dividend or revenue from a self reinvesting fund (check the ICTax website). So again they will only start an inquiry on you if you post an increase in taxable wealth that cannot be justified by your work income. Each year around the same period the forum sees an influx of people asking questions around that topic when we are still to see someone actually testify here that he was classified as a professional trader. I remember a press article saying that per year they had less than 10 people in the whole Zurich canton to be investigated for this.

Final point, the Swiss tax authority is not the IRS, only if you commit fraud will you be prosecuted, if you forget something in your return and they realize it you only risk paying back what you owe with some penalty but you will not go to prison. Really, this topic should not prevent you from sleeping.

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