I wish we could somewhere put a sticky post saying that nobody ever has been deemed a professional trader in this forum ever, and it’s therefore unlikely that anybody asking for it will be a professional trader in terms of taxes.
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from other peoples experience here its really difficult to get “professional trader” status.
Like you could show them that this was your “normal routine” even when you worked.
I would not put to much tought into this status.
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Is that so? Man, that brings me some comfort. So I guess you and others has bought and sold stocks/Cryptos within a 6 month period and now being deemed a professional trader then?
Bought and sold a lot, not deemed as professional. If the gains are not over 50% of your taxable income don’t even think about it.
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I will keep that in mind. Because my gains are like 5% of my taxable income.
I would not quote this sentence as the rule. It really depends on the canton. I once talked to a guy who used to live in canton Schwyz and was classified a professional trader, even though his gains were in the 20k range only. That being said - I don’t know if he used algorithmic trading and how many trades he made during one year. Unfortunately, I only met him once during a meetup. He definitely wasn’t happy that they classified him as a professional trader, because most of his other holdings were passive ETFs.
Just take the story above as a warning. I also talked to my (company) tax advisor, who has studied tax law (dipl. Steuerexperte). He also told me to be cautious when it comes to Kreisschreiben Nr. 36. But it might be different in every canton - I guess in canton Zurich they won’t classify you as a professional trader.
That’s true. Most probably he also sold some ETFs and had to pay taxes on the realized profits.
We’re talking about Switzerland here. Would you go to court for 20K? Chances are high you’ll pay the same amount or more for the lawyer.
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20K (or even less) could categorize you as a professional trader if other criteria are also met. The laws are very vague and leave a lot up to tax offices to decide on a case-by-case basis.
If you realize a 20K capital gain on a trade, but otherwise hardly trade at all, then you should not be categorized as a professional trader. There was a case of a person in the canton of Zurich who realized a gain in excess of 1 million francs, but successfully countered the tax office categorizing him as a pro trader because he made very few trades and only invested his own capital.
On the other hand, if you invest using borrowed money and/or invest other people’s money, you can be classified as a pro trader even with very low (or no) capital gains.
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I also don’t like the vague law in this area. However, I don’t have any concerns at all for regular buy-and-hold, even after potential FIRE. In the accumulation phase, passive investing normally fulfills all 5 criteria of the ‘Vorprüfung’ in Kreisschreiben Nr. 36, in which case there is no risk at all.
After FIRE you might not fulfill criterion 3 of the ‘Vorprüfung’ (realized capital gains less than 50% of net income). However, the three primary criteria (4.3.2 Besonderheiten für Wertschriftenportefeuilles) should not be an issue for buy-and-hold even after FIRE. So purely for buy-and-hold (without significant leverage), I’m not worried.
It could be a real concern for people who want to speculate or use derivatives with a small part of their money while passively investing the biggest part. This doesn’t affect me personally but that’s an area that should really be improved.
Actually it’s harder to answer because I can only assume what he makes in his day job. The ballpark for the trading gains was around 200kCHF.
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Hi all,
Some private investors may be considered profesional investors and thus, taxed on capital gains, based on different criteria:
- Securities are held for at least six months before being sold.
- Capital gains contribute less than 50 percent of net income.
- The transaction volume during a calendar year does not exceed five times the investment portfolio value at the beginning of the calendar year.
- 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).
- 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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Hello fellow mustachians, I have searched the forum but I haven’t found the specific answer to this situation.
If I understand correctly, it is possible for the tax authorities to consider you as a professional trader if more than 50% of your income comes from selling stocks, dividends being considered as income.
Let’s consider this scenario:
I reach my lowest Fire number, let’s say 1 million CHF in VT stocks to make it easy, I don’t have any other source of income. If I follow the 4% rule and can’t go below that because this is what I need, that means living of 40’000 CHF / Year.
1st year: dividends are about 2% => 20’000 CHF, I sell 2% of my stocks and get another 20’000 CHF.
In this case I’m good, my income (dividends) is 50% of the total.
Now, for the following years, something is not clear. More specifically regarding dividends.
If I understand correctly, dividends are not distributed as a percentage of your stock portfolio current value, but as a fixed amount per shares. Meaning that even though my overall stock portfolio value may grow year after year, the amount of stocks will diminish as I sell them, therefore the dividends distributed will diminish.
So for year 2 and so on, the value of stocks I sell will be higher than the dividends I get, therefore taking the risk of being considered as a professional trader.
Again, for the sake of simplicity, let’s say in year 7, I’m getting 26’000 CHF from selling stocks and 14’000 CHF from dividends. In this case I’m above the 50% income and may be considered as a professional trader. This will of course change the way I’m taxed dramatically.
Is my assumption correct or am I missing something, is there any way around this?
Thanks in advance for your insight.
I think you haven’t fully read all those threads you mention. This has been discussed many many times.
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„Die entsprechende Beurteilung erfolgt hierbei auf Grund sämtlicher Umstände des konkreten Einzelfalls“
Tax authorities have defined criteria that lets them (and you) definitely rule out professional trader status.
They are in no way intended to be used for the reverse conclusion (even when you‘d technically violate one).
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At all the people here having an interactive brokers account: Do you have a margin or a cash account and in case you have a margin account, have the the tax authorities ever asked you about it?