My understanding (of a non specialist) is that sudden capital gains on an exit of a startup can be sometimes taxed as income because it can be interpreted as the fact that the value of these investments was underestimated (and the tax paid on wealth was too low) in previous tax declarations. In other words, the capital gains did not suddenly appear at the exit, but are due to previous underestimations.
This gives an incentive to taxpayers and startups not to underestimate the value of their shares.
In many cases though, all of this is ruled in advance with companies (I think it’s called “formulas”), because wealth tax can be really challenging to handle with unrealized profits on a startup that hasn’t succeeded yet. So the value used for wealth tax is determined with some formula instead, but with the deal that the final sudden capital gain against the last declared value is taxed as income.
Again, I’m not an expert, but maybe this gives some perspective. I think these things are complicated enough that the help of a lawyer would be justified.
Appeal and based on what you describe you have good chances to get it overturned. But as @ProvidentRetriever wrote it is not as straightforward as you think. The same logic is sometimes even used for large but still decently growing non-public companies and not just startups, which can likewise also lead to income tax in case of an exit through e.g. an IPO.
Relevant topics in your case:
Why did you invest in/through that club? You need to prove you are not a professional investor. If the 15k was a tiny fraction of your net worth and this was a simple asset diversification you have a good argument
What was your shareholding in those companies? If it was tiny (<3%) and you had no operational role (even as consultant or similar) or knew people personally of the management you have a good argument that this was a simple investment
What reporting did you receive? If nothing you can argue you did not have any basis to previously increase the tax value of the investment. This is a tricky one, as typically investors receive at least yearly financial statements and a report. Can you explain the suddenly much higher valuation, was there a triggering event for that?
What triggered the exit? Did you actively approve/sell/participate or was the decision made for you and you couldn’t even object? Again, the more of a passive investor you were the better your argument that these are capital gains
Not technically but practically relevant: How many other such investments do you have? If many the tax authorities will be much more difficult trying to establish precedent
No experience with such cases but a few years ago, I looked into Private Equity and Pooled Investments. Back then, I read that Investment Clubs must be avoided as the shere presence of a Club justifies for „non-private“ Investment and therefore taxable capital gains. Hence, and befor an appeal - I would simply call them up, and politely ask if they can say whether their ruling was based on the sudden bump or the fact that there was a club in between?
If they mention Club - it may be worth booking this under the lessons learnt bucket…
I second this. In addition, if you have legal insurance try calling them, even if your policy does not cover taxes from my experience you may get lucky and get some basic advice from them over the phone regards how to proceed.
I am no legal expert but I assume the best course of action may be to write to them within 30 days or whatever notice period they have given you to state that you disagree with their treatment and ask them to explain the basis of their decision. I hope they should then write back quoting whichever law they applied. From there you can decide whether to pay a lawyer from your own pocket
Thanks, everyone, for these very interesting observations.
@TeaGhost the investment club angle I hadn’t considered and I can see how they would interpret participation in one as a sign of being a professional investor. In the age of crypto, crowdfunding, and so on this view would need some updating.
@Barto I also heard from someone that normal household/personal liability insurance also has some cover for legal help in such case. I’ll check into it.
@ProvidentRetriever This makes a lot of sense - it’s a way to close off abuse. “last year you said the share was worth 1 chf, and the year after when you sold it magically became worth 100 chf”. In my case, I declared the growing value of the shares each year, based on the valuation provided by the investment club. So hopefully they don’t interpret this as some kind of scheme on my part.
@1742 great list of considerations, very helpful to understand the kinds of concerns they might have and how “grey” this can be in practice.
I will follow up and inform the thread of how things go.
„Die Unterlagen wanderten in die Abteilung für juristische Personen, und dem Clubpräsidenten flatterte umgehend eine Aufforderung der Steuerverwaltung ins Haus, innert 30 Tagen für den Investmentclub eine Steuererklärung einzureichen“
„Bei den direkten Steuern kann ein Investment-Club nicht als Steuersubjekt gelten. Somit haben die Mitglieder in ihren persönlichen Steuererklärungen ihren Anteil am Clubvermögen und dessen Ertrag (unabhängig von einer allfälligen Ausschüttung) zu deklarieren.“
I really don’t think it’s about being a professional investor, if the club just held shares in companies - as opposed to active trading.
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