Interview with Trang Fernandez-Leenknecht: Taxation of digital assets

In an era where digital assets are reshaping the financial landscape, understanding their tax implications, especially the taxation of digital assets, becomes crucial for investors and creators alike.

To demystify this complex topic, we bring you insights from Trang Fernandez-Leenknecht, a renowned international tax lawyer and co-founder of Holistik Ltd.

Trang brings impressive experience from her time in key roles within banking, insurance, and cybersecurity, as well as being a former Director of Wealth Planning at a major Swiss private bank and a Vice-Chair of a billion-dollar pension fund. Her law practice specialises in Swiss and international tax and law, focusing on areas such as wealth transfer, asset protection, and blockchain technology regulation.

Trang’s academic achievements include a MLaw and LL.M in International Taxation, a Swiss Federal Diploma in Financial Planning, a Chartered Alternative Investment Analyst (CAIA) and Certificate in Impact Investing from Oxford University. A recognised speaker at global forums like the United Nations and a published author, she also teaches in Geneva and actively speaks four languages.

Welcome, Trang! It’s a pleasure to have you with us today. To set the stage, could you briefly describe what constitutes a digital asset in today’s financial landscape?

Digital assets encompass a broad spectrum of intangible assets stored and transacted in digital form. These include tokenised assets, Non-Fungible Tokens (NFTs), AI-infused works, and cryptocurrencies. Tokenised assets refer to traditional assets that have been converted into digital tokens on a blockchain, which can encompass real estate, company stocks, precious metals, and even fine art.

In the ever-evolving world of finance and technology, the emergence of digital assets has ushered in a new era, reshaping traditional notions of wealth and investment. In fact, digital assets, particularly in the Metaverse and NFTs, have revolutionised the way we perceive, collect, and trade these new forms of wealth.

From a Swiss perspective, these assets are subject to taxation, and the tax treatment depends on the specific nature of the digital asset. For example, cryptocurrencies like Bitcoin and Ethereum are generally treated as taxable assets, subject to wealth tax and potential capital gains tax upon realisation.

Art behaves differently from other asset classes. What do you think are the prospects of the digital art market?

The digital landscape has witnessed a transformative evolution, giving rise to novel forms of artistic expression and economic opportunities, in particular in the Metaverse and with NFTs.

From a Swiss perspective, these assets are subject to taxation, and the tax treatment depends on the specific nature of the digital asset.

Trang Fernandez-Leenknecht

The Metaverse is a virtual world (Web3) in which users can interact and transact with other people. Activities and transactions take place there (ex. music, videos, sport, games, services). NFT, a unique cryptographic token that cannot be replicated, certifies or represents physical or digital assets.

Artificial Intelligence has also become an integral part of the creative process in the digital art space. Art is among the hottest markets linked to this switch, with artist like Beeple or masterworks like Zarya of the Dawn.

Interesting. But is the virtual world different from the real world?

The virtual world can co-exist with the real world (e.g. purchase of customised shoes in the metaverse delivered to your home). The companies that manage the Metaverse may also charge commission for transactions concluded on the platforms.

The possibilities offered go beyond what legislators had envisaged when adopting the tax laws. Therefore, some fundamental questions arise regarding the general principles of taxation (such as residence, source, tax capacity, equal treatment). For example, while Swiss tax laws recognise the value of these assets, shall the taxation of transactions in digital art align with established principles governing transactions in traditional art?

In principle, transactions should be treated in the same way as comparable transactions in the “real” world. Through tokenisation, tangible and intangible assets in the physical world (e.g. commodities, CO2 certificates) are digitised as tokens on the blockchain. Real-world assets (RWAs) are gaining momentum and raise interest from traditional finance players as a way to democratise conventional financial markets and enhance liquidity.

Switzerland has demonstrated innovation when it adapted its tax laws to accommodate the rise of digital assets. The taxation of income from these assets depends on whether they are classified as private assets or business assets.

A collector who sells a work (in digital form) could be considered to be acting as part of a hobby as opposed to an art dealer. An artist would therefore have to determine whether (s)he was working as part of a hobby or carrying out an activity like a professional dealer.

The sale of NFTs may be subject to capital gains tax when the transaction is carried out by companies or individuals qualified under certain conditions as professionals.

By understanding the tax implications, creators, collectors, and platforms can navigate this space with confidence, ensure compliance, and foster a sustainable and innovative digital ecosystem.

Now, let’s address a crucial aspect: How is the taxation of digital assets handled on an international scale?

Investing in digital assets seems possible for all and everywhere nowadays.

Platforms play a pivotal role in the creation, distribution, and sale of digital assets. As such, they will contribute to the taxation landscape in facilitating tax compliance for creators and buyers.

The taxation of income from these assets depends on whether they are classified as private assets or business assets.

Trang Fernandez-Leenknecht

In terms of direct taxes, the European Union (EU) will require platforms to collect information on transactions carried out by users (DAC7), e.g. a Metaverse-type organisation will be obliged to report.

The use of platforms as intermediaries to collect tax is also in development (in EU law “VAT package on e-commerce”; reform project in Swiss law). This obligation to levy VAT on platforms could eventually be extended to the field of digital services (ex. Metaverse users who sell digital goods or provide services to users).

The taxation of digital assets in Switzerland and Europe is an intricate field that requires a nuanced understanding of both local and international regulations, especially as digital assets transcend borders. The EU has been active in developing a unified approach to the taxation and regulations of digital assets, among these is the Markets in Crypto-Assets Regulation (MiCA), which institutes uniform EU market rules for crypto-assets.

What is your advice to investors and creators in digital assets?

From AI-generated artwork to smart contracts facilitating cross-border transactions, the prospects for investing in digital assets are promising, but investors must navigate the regulatory landscape carefully.

As a Swiss entrepreneur specialising in tax law with a keen interest in finance and technology, staying abreast of the evolving landscape surrounding digital assets is essential.

Tax is a major aspect of holistic management for cross-border businesses and mobile families, and sound financial risk management must integrate excellent international tax groundwork and monitoring.

By addressing the jurisdictional challenges, embracing the prospects of the digital market, and comprehending the taxation nuances, individuals and businesses can navigate this space with confidence, ensure compliance and foster a sustainable and innovative digital ecosystem, while positioning themselves strategically in this dynamic and transformative financial landscape.

Thank you, Trang!

Read more about NFT Taxation in Switzerland and Europe:

• Financiarisation des jetons non-fongibles (NFT): aspects fiscaux en Europe et Suisse, Lawyer International, issue 2023/1 p.45-48, September 2023 (in French).
• Non-Fungible Tokens (NFT) Expanding investment opportunities: Tax outlook and challenges in managing unique digital assets, GSCGI Wealth Gram, October 2021 (in English).