VAT of Token Sales
The assessment of an ICO under VAT and the use of respective token depend on the token`s function and classification. Tax consequences are to be examined individually on the basis of relevant documents such as terms of agreement, conditions of use, the white paper, etc.
Whether the sale of tokens is subject to VAT depends on whether the (1) token constitutes a taxable supply for VAT and (2) the buyer is resident in Switzerland or abroad (see Tax Classification). 7.7% Swiss VAT levied on the sales price applies to a taxable token sold to a Swiss resident.
It is crucial, therefore, for the issuing entity to document whether the tokens have been sold to a Swiss or a foreign resident. To aid, the entity could use KYC data.
In practice, an issuing entity faces greater challenges than just the VAT leakage of the token sale. Most of the entity`s expenses (except for salary payments) are subject to either Swiss domestic VAT or Swiss reverse-charge VAT (for services received from abroad). Should the development company`s revenues be all exempt (due to sale of an exempt token), the entity will not be able to recover its input VAT. Accordingly, this means a 7.7% VAT on most of the costs incurred by a Swiss entity, which is often significantly higher than income taxes paid by the issuer.