Although cryptocurrencies first appeared in 2009, there was a complete legal vacuum in France for almost five years. Then on 11 July 2014, the first administrative doctrine on the subject was published (BOI-BNC-CHAMP10-10-20-40). Taxpayers can challenge the authorities based on this doctrine. Despite being highly questionable, it had the merit of existing.
Since 2014, case law, the legislator and the tax authorities have clarified the system. Although still incomplete and subject to change, it is now possible to get a general understanding of the tax regime for cryptocurrencies in France.
– CJEU ruling C 264-14 of 22 October 2015 « Hedqvist » clarified that cryptocurrency exchange transactions are not subject to Value Added Tax (VAT).
– Article 150 VH bis of the French General Tax Code (CGI), introduced by the Finance Act for 2019, subjects gains on the resale of cryptocurrencies made by non-professional individuals subject to taxation at the overall rate of 30% (flat tax also applicable to income from transferable capital).
– Article 92, 2,1° bis of the CGI changed the tax regime for professional individuals by making them subject to non-commercial profits (BNC) rather than industrial and commercial profits (BIC) from 2023.
This summary will provide the reader with an initial overview of the tax regime for cryptocurrencies in France applicable to private individuals.
However, it’s important to note that this system is still evolving and may not always keep pace with the frequent changes in this dynamic sector.
1. Tax system applicable to private individuals (personal income tax).
1.1 Profits and losses from selling cryptocurrencies.
Due to the fluctuating nature of digital assets, individuals mainly experience income or losses through capital gains and losses from the difference between purchase and sale prices.
1.1.1 Taxation system.
Following the period of uncertainty mentioned in the introduction, the taxation system for these gains and losses was codified in Article 150 VH bis of the CGI by the 2019 Finance Act.
This article covers not only cryptocurrencies but also all digital assets within the meaning of the French Monetary and Financial Code (CMF).
Its main characteristic is the taxation of capital gains generated from transactions involving consideration (including goods and services) But it does not tax simple exchanges between digital assets, which are categorized as intermediary transactions.
In addition, this provision specifically excludes exchanges carried out on a professional basis from the scheme, a point to which we will return below.
In principle, capital gains on cryptocurrencies are subject to flat tax at an overall rate of 30% (12,8% income tax and 17,2% social security contributions). As mentioned above, this tax rate is equivalent to that applied to capital gains on securities and, more generally, to income from transferable securities
However, since 1 January 2023, taxpayers have had the option of applying the progressive income tax rates to capital gains on crypto-currencies. With this option, capital gains on cryptocurrencies are added to the tax household’s total income. Given that progressive income tax rates in France range from 11% to 45%, this option will only be of interest to low-income taxpayers.
Moreover, unlike the system applicable to securities, any capital losses can only be offset against capital gains for the same year.
In practice, this means that a capital loss in one year cannot be offset against a capital gain in a subsequent year. Given the volatility of cryptocurrencies, this rule is particularly unfavourable to taxpayers.
While the tax rate applicable to capital gains on cryptocurrencies follows a well-established system in French tax law, the calculation method is highly specific.
1.1.2 Capital gains calculation method.
Generally speaking, the calculation method is quite incomprehensible and lives up to the reputation of French technocracy.
In summary, the taxable capital gain is calculated not for each cryptocurrency but for the taxpayer’s overall portfolio of digital assets. This requires determining the total acquisition cost of the portfolio, its total value at the time of partial disposal, and the proportion of assets disposed of.
Then, you can calculate the difference between the sale price and the product of the total acquisition price of the entire asset portfolio multiplied by the ratio of the sale price to the total portfolio value.
A capital gain or loss will therefore have to be calculated for each sale for valuable consideration.
This rule is particularly restrictive and inappropriate given the large number of disposals that can be made of this type of asset.
To do this correctly, previous disposals must be taken into account to recalculate both the acquisition value of the portfolio and its overall value after deducting the assets already sold.
In practice, if the number of disposals is large, it is virtually impossible for a private individual to declare his taxable capital gains.
Consequently, the taxpayer will need to seek help from a tax professional to ensure their tax returns are completed correctly.
For those discouraged by this complexity and considering leaving France to avoid being classified as a French tax resident, it’s important to note that French law includes an exit tax on unrealized capital gains (Article 167 bis of the CGI). But the law does not specifically mention digital assets.
However, it is far from certain that this loophole will not soon be filled by the legislator.
1.2. Mining.
Mining is the transaction validation process associated with blockchains operating on the Proof of Work (PoW) consensus. This is particularly true of the Bitcoin blockchain. In exchange for their work, miners receive a reward in crypto coins.
The question is how this « reward » is taxed.
French law is silent on the tax status of the cryptocurrency miner.
To our knowledge, the Conseil d’Etat, which is the highest administrative jurisdiction in France, has ruled only once on the matter (CE of April 26, 2018, N°417809), and considered that these « gains » must be taxed in the non-commercial profits category.
Indeed, for the Conseil d’Etat, these « rewards » do not constitute a capital gain resulting from an investment transaction but are the consideration for the taxpayer’s participation in the creation or operation of this virtual unit of account system.
Adopting this jurisprudence as its own, the French tax authorities take the same position in their administrative doctrine (BOI-RPPM-PVBMC-30-10 n°70), since they also consider that gains realized in this way come under the non-commercial profits regime. It specifies that the acquisition value used to calculate taxable income is zero when bitcoins have been allocated free of charge.
Considering these factors, one might conclude that these operations are classified as non-commercial profits in all cases.
Taxation in the non-commercial profits category implies taxation at the progressive income tax rate. As previously mentioned, given the progressive tax rates ranging from 11% to 45%, taxation in the non-commercial profits category is not neutral from a tax point of view.
However, this conclusion seems a little hasty, especially considering that the only legislative provision (article 150 VH bis) applicable to cryptocurrency gains applies a flat rate of 30% to all gains from non-professional activities.
In our view, a distinction should therefore be made between professional miners, who could come under non-commercial profits, and non-professional miners, who would come under the proportional rate of article 150 VH bis. Due to the significant difference in tax rates between these two systems, this issue is far from neutral and could potentially lead to disputes.
Finally, a literal application of the text would lead to these gains being taxed only when the acquired crypto-currencies are resold, and not for the year in which they were mined.
1.3. Airdrop and revenues obtained through staking and other passive rewards mechanisms.
In the absence of specific legislation governing these activities, such gains should be subject to article 150 VH bis (flat-rate tax of 30%) if they are realized by non-professionals.
If these activities are carried out by professionals, they should come under non-commercial profits, in application of article 92, 1 of the CGI.
A literal application of the text would again lead to these gains being taxed only when the acquired cryptocurrencies are resold.
However, we must mention here the specific issue of fiat currency loans backed by cryptocurrencies (backed loans), a solution often proposed in decentralized finance (DEFI).
Indeed, the tax regime applicable to unrealized capital gains on cryptocurrencies is highly uncertain.
As per a judgment from the Nanterre Commercial Court on February 26, 2020, Bitcoin (BTC) is fungible and consumable. It is important to note that this ruling is from a lower court and will need to be confirmed or overturned by higher courts.
However, as it stands, it should be concluded that the lending of cryptocurrencies should entail taxation of the related unrealized capital gains, posing a significant barrier to such transactions in France.
1.4. NFT (Non Fungible Token).
French tax law currently lacks specific provisions for NFTs, making the tax treatment of NFTs uncertain at present.
Gains on the sale of NFTs are likely to be taxed either :
- under article 150 VH bis of the French General Tax Code (at a flat rate of 30%),
- or under the general capital gains tax regime for the sale of movable property set out in article 150-U-A of the French General Tax Code (36.2%, but only for sales in excess of 5,000 euros),
- or, depending on the specific nature of each NFT, under the regime applicable to the sale of works of art or other underlying assets.
Considering the rapid growth of this business sector, legislative or doctrinal clarification would be welcome.
1.5. Tax reporting obligations.
Most digital asset holders have opened an account on an exchange platform located outside France. So they are obligated to annually declare these accounts when submitting their income tax returns. They using a specific form (Form No. 3916) and specify the details of their digital asset accounts.
Failure to comply may result in penalties, including a fine of €750 per account and €125 for each error. These penalties are doubled if the total value of the accounts exceeds €50,000 in a given year.
In addition, any capital gains or losses recorded during the year in accordance with the rules set out above must be declared on a specific form (n°2086) and reported on the n°2042 C tax return.
2. Tax system applicable to professionals (personal income tax).
When individuals engage in the purchase and resale of digital assets on a professional basis, it falls under the provisions governing professional income rather than Article 150 VH bis.
The first and main difficulty will therefore be to determine whether or not the activity is carried out on a professional basis.
2.1. The concept of professional activity.
In their commentary on Article 150 VH bis of the CGI, the French tax authorities distinguish between gains from occasional disposals of digital assets and capital gains resulting from the regular practice of purchasing digital assets with the intent to resell them.
The tax authorities appear to consider both the factual criterion of transaction frequency (habitual nature) and the intentional criterion of purchasing with the intention to resell.
In its aforementioned ruling of April 26, 2018, the Conseil d’Etat focused primarily on the intentional nature, the purchase with a view to resale.
However, the Finance Act for 2022 has introduced a change concerning this concept. With effect from January 1, 2023, proceeds from the purchase, sale and exchange of digital assets carried out under conditions similar to those characterizing an activity carried out by a person engaged in this type of transaction on a professional basis will come under the heading of non-commercial profits (article 92 2.1° bis of the CGI).
This criterion seems to focus more on the conditions under which the activity is carried out and in particular the use of professional tools or the complexity of the operations performed.
This raises a number of questions.
What frequency of operations will the authorities define as professional activity ? Which operations are targeted ? Only sales ? Purchases with a view to resale?
What about, for example, purchases with a view to leveraged speculation, but with very « occasional » or even rare resales in legal tender ?
What about the initial implementation of an automated buy-sell system, but without any « activity » on the part of the person concerned (programming a trading bot )?
All these questions have no definite answer today, and are a source of litigation.
2.2. Taxation system.
With regard to the tax regime itself, the Finance Act for 2022 has implemented a modification.
From January 1, 2023, the professional activity of buying and selling digital assets is taxable under the category of Non-Commercial Profits rather than under the category of Industrial and Commercial Profits.
This distinction is crucial : income under the category of Industrial and Commercial Profits is calculated based on accrual accounting (receivables and payables). Earnings under the category of Non-Commercial Profits are calculated based on cash accounting (receipts and payments).
As a result, unrealised capital gains, which are taxable as Industrial and Commercial Profits, should no longer be taxable as Non-Commercial Profits. And intermediate transactions (selling one digital asset to buy another) could generate no taxable income.
This would make professional trading in digital assets much more attractive from a tax point of view than it was previously.
Conclusion :
In conclusion, it is evident that the taxation of digital assets is still in its early stages. The subject is new, linked to an innovative technology that is still finding its applications.
As a result, there are still few legal provisions on this subject in France. Even when they do exist, they are often incomplete, subject to interpretation. They’re also highly likely to change in the short and medium term.
To date, the authorities have been very cautious in their inspections. It has resulted in virtually no litigation as things stand. Without disputes between taxpayers and authorities, there is no case law, and without case law, uncertainty remains.
In any case, all cryptocurrency holders engaging in taxable transactions are encouraged to consult with a qualified tax professional.
Jean-Pascal MICHAUD
Avocat en droit fiscal
