Getting classified as professional investor

Hello,

I am curious about a special case in being classified as professional investor. Take this example:

  1. A person earns CHF 300k a year brutto, but only spends 50k nett a year due to frugal lifestyle
  2. In one tax year, a person realizes CHF 900k from capital gains.

Would such a person break the following rule:

  1. Achieving capital gains from securities transactions is not necessary to replace missing income to sustain your living. This is regularly the case when the realized capital gains are less than 50% of net income in the tax period.

So, it is much more than 50% of net income, but it does not replace the missing income. What does it mean “this is regularly the case”, if it is not usually the case? What if the person did not spend any of that money, and the sale was solely to rebalance the portfolio?

Does anyone have any such personal or documented examples of such situation?

Do you actually mean realized capital gains, i.e., that person sold investments? If so, for what purpose, if that person only spends 50k a year?

If you instead mean unrealized capital gains, that person wouldn’t break the 50% criterion.

Assuming

  • there is no substantial change in reported wealth apart from those estimated 150k new savings from income, meaning you have previously reported these 900k of expected capital gains as wealth and are not selling non-traded shares at a suddenly much higher valuation
  • this was really only for portfolio rebalancing and done in one or very few transactions and is a one-time event

this should not be an issue.

But, at this level of potential income with a six-digit tax impact, some cantons will certainly look closer and might want to discuss various details. This detailed assessment might end-up qualifying you as professional trader for other reasons.

How did you get to 900k of unrealized gains? RSUs/employer stock received over man years that you never sold until now? Not an issue. Heavy and successful trading over the past year(s)? You’re in for some trouble.

Yes it would break the safe harbor rule, but there’s no way this person is qualified as professional investor.

(I assume the 900k are just e.g. RSU or regular investments, not some very active trading¸and there is no drastic increase in wealth through trading, but even then only few cases would get classified as professional).

I’m not sure we’ve yet found anyone on this forum that got classified, and some people do very active trading incl. leveraged strategies.

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Yes, this is all assuming no other rule got broken. But technically, NO rules are broken, as the capital gains are not used to replace the income due to full time employment. The employment income is enough to sustain the living. Is that right? The rule is super ambiguous.

Let’s say this scenario:

  1. A person has been holding 200k of Ethereum for 3 years, no trading. 800k are other investments. Total net worth at the end of the year is therefore 1 million, wealth tax is paid.
  2. Next year, Ethereum appreciates 10x to 2 million, the other investments appreciate 25% to 1 million. Total net worth 3 million.
  3. Half of the Ethereum is sold, generating circa 1 million of capital gains. This money is rebalanced into other investments immediately, none of it is spent on lifestyle.

I find it really weird that it is taxed either at 0% or 45% (marginal income tax rate), and nothing in between, and you have no certainty which it is going to be.

Note that these numbers are hypothetical to better display the point and to have nice round numbers. :slight_smile:

In my view, as long as the situation can be clearly explained and no financial product or financial arrangement has been put in place (i.e. gain solely on the capital gain and upside explosion of the asset in question), I see no risk in being classified as a professional investor.

An example along the same lines: when someone inherits a very large fortune in a direct line, for example, their status does not change. The comparison may not be exact, but the impact of the situation may be the same…

Pretty certain it’s 0%. There’s nothing here that looks like professional behavior.

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Exactly - case closed (on this single criterion) by applying common sense.

It can be assumed in all but very extraordinary cases: if capital gains are less than half of the income, they usually are not considered to substitute „normal“ taxable income.

Note that even when capital gains are substituting for other (taxable) income, you still will rarely be considered a professional trader. You may live from proceeds of selling assets without being taxed as a professional trader - exactly as you describe (you sell in one year).