Taxation of capital gains on option trading

Dear fellow amateur investors
I sell put options to generate income, usually on positions expiring in the next 4 to 6 weeks max; as a result i will have a high number of trades, each for small amounts.
Will the short duration of the options be seen as active trading by the tax authorities and therefore taxed on the assumption i behave as a professional trader?

The precise answer is : maybe

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Trading of derivatives that goes beyond hedging risks of your investments is considered one of the main three criteria for professional trading, if the trading volume is sufficiently high relative to your wealth.

As you write you’re selling options to generate income, I assume it’s not just tiny volume to play around with and thus, classification as professional trader seems like a real possibility. However, there are many people who sell options without being classified as professional trader. I.e. see @REandSTOCK’s comment.

See also Kreisschreiben Nr. 36 - Gewerbsmässiger Wertschriftenhandel | Swiss Tax Law

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It mainly depends on the canton you live in. Some cantons (e.g. Schwyz) are notoriously pesky and follow the already mentioned Kreisschreiben Nr. 36 very closely. The main problem is that the 5 criteria have to be fulfilled cumulative. By writing options, you are already violating points 1. and 5. in Kreisschreiben Nr. 36

You might be able to get away with it if you live in canton Zurich or Zug. Still, if the generated income writing put options is high enough compared to your annual income, you might be classified as a professional trader.

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To elaborate a bit, if you fulfill all of the 5 criteria of the “Vorprüfung”, you’re guaranteed not to be classified as professional trader. However, violating one of these 5 criteria does not necessarily imply that you are classified as professional trader, even when the authorities strictly follow Kreisschreiben Nr. 36.

The 3 criteria (somewhat vaguely) described later on decide the classification: trading volume, use of leverage, and trading derivatives beyond pure hedging. The use of leverage is the most important criterion.

:+1:

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I agree. Thanks for elaborating more on the 5 criteria. Indeed, I should also have mentioned your points as well.

I met someone 2y ago during a meetup (not from this forum, but another one) who lived in canton Schwyz and just sold put options. He didn’t use leverage at all, but of course it was not hedging in his case (how can selling put options and earning the premium be counted as hedging anyway?), and yet still he was classified as a professional trader and had to pay capital gains plus AHV on his trading profits. I don’t know about his trading volume though. Unfortunately, I don’t have his contact details, but maybe I’ll meet him during the next month.

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Thank you for the insightful comments Jay and FireStarter
Further thoughts:

  • if one is classified as professional trader, then he /she will need to pay taxes and AHV only on the portion of Investments where the 5 rules are not met, or also in the rest of the investment universe of this person?. For example extending into capital gains of a portfolio of stocks that are kept for the long haul?
  • if one has a full time employment, the professional trader classification might count as a violation of the employment contract ? Will the employer be notified of the authorities decision reg. Professional trading?
    Thanks for any further insights.

The way I understand it ALL of your portfolio is counted, meaning that all capital gains are then taxed. So you are infecting your “private” portfolio. Which is rather unpleasant, because you don’t want to pay capital gain taxes on the long term stocks which you are not planning to sell. Note: I’m still not sure if my understanding is correct.

Yes, that could be classified as a violation of the employment contract. I don’t think the authorities will be notifying the employer though. This is an assumption though.

I guess it really comes down to the percentage of income you are generating with the option writing, plus the canton you live in. You might be classified as a professional trader in canton Schwyz for just writing options which generate 1k per year, while you are not classified in Zurich for writing options which generate 25k per year (while earning 100k).

I read a little bit more on the topic, and found the following article from NZZ in 2019: here (in German)
It mentions that canton ZĂĽrich only classified 100 private people in the previous 5 years (before 2019) as a professional trader. One reason for this: once you have professional trader status, you can also deduct losses from the profits.

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Lots of useful information; I will further check with the tax authorities. Thanks for the coaching

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Hi i am new to investment and I just came up with a question about 2 criteria (Capital gains of private investors do not account for more than 50 percent of their net income). So for example if my net salary is 50k/year I invest 100k in stocks for 1 year, i gain let’s say 30% so 30k which is already >half of my net income, i instantly classify as a professional investor? Does it apply only if I want to sell my stocks and take out cash or if i keep my stocks? And what if i am married, my joined net income is let’s say 100k/year, then i could invest 2x more without being classified as professional and pay capital gain tax?

The criterion of staying below 50% of your net income only refers to realized capital gains. As long as you’re just accumulating/holding (without leverage) there should be no risk of being classified as professional trader, as I understand it.

Das ist regelmässig dann der Fall, wenn die realisierten Kapitalgewinne weniger als 50% des Reineinkommens in der Steuerperiode betragen.

Ordentlicher Anknüpfungspunkt für die Beurteilung der Frage, ob die steuerpflichtige Person eine auf Erwerb gerichtete Tätigkeit ausübt, ist das Vorliegen einer oder mehrerer Veräusserungen. Erst in diesem Zeitpunkt sind alle Umstände bekannt, die für die Beurteilung massgeblich sind.

As cannot be said often enough:

Nobody will be instantly classified as a professional investor. The oft-cited criteria set by the federal tax administration are designed to (when fulfilled cumulatively) preliminarily rule out professional investing/trading.

The fact that something can not instantly be ruled out from though does not mean that the opposite must then be “true” or applicable - let alone that it could be so determined instantly.

You will almost certainly be able to do even that without being considered a professional investor. The laws, regulations and adjudication are not meant to penalise you for being a frugal and successful investor and making a trade or “cashing out” your returns every once in a while.

If, on the other hand, you sustainedly engage in systematic and/or leveraged trading and use that to make a living and/or substitute work income, chances are you will be deemed a professional investor.

Put differently, you can think of it like this: Capital gains from personal investments are free.
You should just not overdo it or flagrantly abuse that principle (or else you will be paying taxes).

Some tax authorities will be stricter and other more lenient. But as a rule of thumb - and not only for securities trading - tax authorities will be concerned with your activities (only) once become a job to you (though it doesn’t have to be your primary job, and yes, there are often grey areas between having a job or professional activity and merely helping the neighbours or pursuing a hobby).

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Thanks for the answer! So to be completely clear if I want to save systemically all the time, always put money aside and invest not selling more often then 6month and at some point like in 5 years let’s say my stocks are worth 250k. Then i decide to realise them to buy a house. But my salary at that time will not be 500k so will i pay taxes on capital gains? And furthermore once i am considered as professional trader will it apply all my life? Can i somehow prove I want to become private investor again?

You won’t be classified as a professional trader for this. Please note that selling every 6 months is not the best idea, because you are missing out on compound interest. Investing in stock market is playing the long game (10+ years).

If your stocks are worth 250k in 5 years (and let’s assume the capital gain was 100k), it’s no problem to sell them all at once, because you held them longer than 6 months

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