Tax rules for private investors labeled as professional traders

Taxes
#1

I have a number of questions related to taxation from trading stocks and derivatives.This is the first year that I will be probably be labeled as a “professional” trader according to these rules: https://www.moneyland.ch/en/stock-market-profits-tax-free .

I am hoping someone with more experience can give me some pointers with respect to how the taxable income is computed. Recommendations for a tax advisor (Zurich) are also welcomed - someone that can explain the rules rather than submit a tax declaration on my behalf. Also, if there is sufficient interest in the topic, I will try to share my experience and what I learn in the process.

In particular, I have the following questions:

  1. When determining profits: a) is the market value of all securities or derivatives considered, or b) are only the realised gains taken into account. For example, let’s say I have an open option position that shows profit on 31.12.2020. Will the profit be taxed in 2020 or in 2021 when I close the position and realise the gains.

  2. Do I have to realize losses (e.g., similar to the US) to reduce my tax bill? In general, once one gets labeled as a “professional”, are there any trading patterns that can reduce my taxable income? For example, establishing a stock or option position that could move the profits to the next year or postpone the tax until the gains are realized?

  3. Can I avoid taxes on capital gains for stocks held for more than 6 months? Let’s say I have an account where several stock positions are maintained for more than 6 months but there is some additional trading that gives me the “professional” status (i.e., significant stock and option trading unrelated to the said stock positions). Will I be taxed also on the gains for the stocks that I held according to the rules of a “private investor”? What about the same scenario but now I have two different accounts, one for trading and another one for long term investing?

Any comments/suggestions are greatly appreciated!

#2

IIUC the 6 month rule doesn’t apply anymore once you’re getting the “professional trader” status.

I think Capital gains is also on unrealized profits.

E.g. if you have a position in the red at year end you would have to declare them as losses, yes.

#3

If considered a professional trader, you will be taxed on realised gains/losses.

The positions at year end will be added to your taxable wealth, capturing any unrealised gains or losses. You will not be taxed until realisation.

The 6 months rule will not apply anymore and your professional status will apply to all your investments accounts.

The tax authorities don’t grant the status that easily. It’s a double hedge sword for them. Indeed, any losses will reduce your taxable income and the taxes you’ll pay.

I would recommend you to get in touch with a professional tax advisor in Zurich. Looking at all your questions, it may be worth it to pay few hundred chf for a proper analysis of your tax situation, including the Swiss social securities impact of being categorised as a professional trader.

#4

Are you sure? That would be quite extraordinary. I don’t know of any other country which would tax unrealized gains. *) How would that even work? If I hold a profitable position for several years, I would have to pay tax every year? Likewise, I don’t think there will be a tax deduction for unrealizes losses.

*) Not counting the tax on redistributing ETFs because that’s actually tax on dividend.

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#5

Thank you very much for the reply.

I am searching now for a tax advisor. In the meantime, I just want to understand if I should realize loses to balance out the gains. If I understand you correctly, I can redirect all gains from being considered income to being considered wealth. This would significantly change the tax impact.

You also replied to another question that I forgot to add - what happens if I have realized/unrealized losses next year and if I can deduct those from my overall income :).

Do you have any idea if I can request a clarification on my status from the tax office before filing my taxes? For example, provide them some high-level statistics (realised/unrealised profit, ratio to my regular income, number of trades/positions for current year, trade types, etc.) and ask if I should file as private of professional? I dont want to go through the process of selling/re-buying and incurring the spreads 2x just to realise losses and be on the safe side.

#6

I agree with you. I also expect taxation to be only on realized gains. @Guillaume_GVA’s reply also suggests taxation only on realized gains.

#7

It is my understanding that you can request a binding assessment up front but it may cost something.

Somewhat related: there isn’t a separate tax % for capital gains, right? They would just be added on top of any other income and taxed with the same rate?

The AHV payments would also be a significant factor. If triggered, 5.3% (or even 10%) is not insignificant in addition to the taxes.

#8

Yes, I also assume that capital gains, when taxed, are added on top of whatever income one has. So there is quite a bit at stake as the trading profits push up the overall tax rate on the whole income.

I played with this calculator a bit: https://ch.talent.com/en/tax-calculator . For example, seems like 50k trading profits added to an 150k income results in 20k in additional taxes (40% marginal tax rate). The higher the income, the worse it gets.

#9

All income, realised gains and losses will determine your taxable income.

Opened positions (including unrealised gains and losses / difference between purchase price and market value) at year end will be part of your taxable wealth.

Unrealised gains/losses are not relevant here.

Realised losses should be deductible.

No idea for Zurich. I’m not aware of such treatment in Romandie.

#10

Can I ask if this is your situation or what is it that will trigger the professionalism clause for you? Some cantons are quite permissive with the limits while others are stricter so sharing this info will definitely be useful for everyone.

P.S. If you made 50k in trading profits, congrats!

#11

Sure, no problem with sharing. These are the criteria and how I relate to them.

  1. You hold securities for at least 6 months before you sell them.

I’ve sold securities after less than 6 months. I think the count is < 20. Maybe I could argue there were uncommon conditions? E.g., large price fluctuations, changing market conditions that made me rethink the investment.

  1. The transaction volume of all of your securities trades combined (total spent on purchases and total earned on sales) is not higher than 5 times the total value of your securities at the start of a tax year.

I think I still fit this criteria. But in an account doing only option selling/buying is easy to get over 5x total portofolio value over a year.

  1. Capital gains generated through securities trading do not account for a significant portion of your basic income. The rule of thumb: Capital gains should account for less than 50 percent of your net income.

I clearly fit this criteria irrespective of how capital gains are calculated. Worst case I will be around 25%.

  1. You use your own assets to finance the purchase of securities. Or: Taxable returns like interest and dividends are higher than interest owed on loans.

I have a margin account so is unclear if I fit this criteria. I think I was at most 10% leveraged over this year. Technically, I only borrowed money once or twice due to trading in a different currency and this lasted for a few weeks. But the loans were covered by funds in other currencies so I did not have a negative balance and I was not overly leveraged.

  1. If you invest using derivatives – and options in particular – these can only be used to hedge your own securities.

I use options to reduce the cost basis of a stock, get cheap leverage for directional trades, profit from volatility changes, or substitute stocks to reduce capital allocation. Maybe some of these could be categorized creatively as hedging :). I also have option positions where I dont and did not own underlying stock.

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#12

I am new and still learning. This year was very easy for anyone to make obscene % gains given how the markets went.

#13

Thanks for sharing. These are the federal guidelines which cantons can implement. For instance in Zug they have adjusted many of these, some are more lenient, some stricter.

For instance ZG allows option trading if the total number of all transactions does not exceed 100 per year. Without derivatives it’s 200 transactions. Likewise, only the majority of stock has to be held for at least 6 months.

ZG is stricter with the total value of securities (200 kCHF) and transaction volume in CHF.

I do exactly the same. When selling puts I’m not often assigned though…With covered calls it’s simpler: they can be easily argued to be downside protection.

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#14

Put selling can also be labeled as downside protection (the premium collected is a small hedge towards price decreases). Doing the opposite, i.e., buying calls/puts, can also be argued that it offers downside protection as it has a defined risk and unlimited gains profile. Anything that brings in money or has defined risk can be argued to have some downside protection and hence is a hedge :wink: .

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#15

Interesting! What do you mean exactly by the 200kCHF? If you have more, your are a professional? And where can you find out the limit by each canton?

#16

I found the info for ZG on the tax office’s website. It’s a bit vague when the 200k limit might apply. I interpret it in the way that if you clearly don’t fulfill the five federal criteria, then they will use this list as a rough guide. If one is passively holding ETFs and shares and not trading derivatives, I doubt crossing over 200k would suddenly make a professional if you are otherwise compliant with the federal guidelines.

Apart from that, I only found similar guidance for BE and some harder to understand text for SZ (which was by far the strictest).

#17

Have you fellas been able to find anything alike for ZH?