Investing in digital assets (crypto-currencies) has been offering excellent returns for some years now, and is attracting more and more investors.
However, their virtual nature raises many questions about their taxation, particularly where cryptocurrencies are concerned.
What about unrealized capital gains? Can you pay a supplier?
The 2019 Finance Act has clarified the tax treatment of capital gains on sales of digital assets. It distinguishes between two very different cases:
- investments by private individuals
- investments made by companies
Taxation of crypto-currencies for retail investors
Before going into detail, it is necessary to underline a few important points about digital capital gains on private assets:
- Capital gains apply only to the sale of digital assets in exchange for an official currency (euro, dollar or other) or the purchase of a good or service.
Ex. 1 selling Bitcoin to obtain another cryptocurrency does not result in a capital gain.
Example 2 payment in Bitcoin for a Tesla car generates a capital gain
- The capital gain is calculated on the overall capital gain of the portfolio and not of the digital asset sold, in proportion to the relative value of this asset in the portfolio.
Ex. the sale of an asset representing 50% of the digital portfolio is taxed on 50% of the capital gain on the portfolio, not on the asset sold.
- A tax household’s overall capital gain on the sale of digital assets is subject to a flat-rate tax of 30%, including social security contributions.
Passive income: mining, lending, staking
All these operations involve generating income passively by locking in an asset:
- Mining with computer processing power
- Lending cryptocurrency as liquidity against interest in the case of lending.
- Locking digital assets for blockchain operation in the case of staking
For tax purposes, these passive gains are considered as BNC and taxed as such. They must be declared in the year they are received.
However, passive income obtained in the form of a digital asset can be considered as part of the digital portfolio and acquired free of charge. The capital gain will then be calculated at the time of sale.
Marketing operation: airdrops and token distribution
To increase their visibility, some platforms offer free digital assets to their customers under certain conditions.
Ex: Gift of x digital assets for every account opened, service used, new customer referred.
The Finance Act distinguishes between two different cases:
- Windfall gains, which cannot be anticipated and do not recur, are not taxed.
- Gains paid in return for an action carried out by the individual must be declared as BNC.
Digital asset donations
The law makes no distinction between digital and real assets, and the latter are therefore subject to the usual gift tax and benefit from the same tax allowances.
When these digital assets are sold in the future, the capital gain will be calculated on the basis of their value on the day the gift was received, and not on the day they were acquired by the donee.
Gains from trading digital assets
These derivatives are defined by a contract between the parties involved (usually a private individual and a broker).
In theory, these gains linked to a financial contract should be considered as income from movable capital and be subject to a flat-rate payment of 30%.
In reality, these gains are most often acquired in the form of digital assets, impossible to dissociate from the other assets in the digital portfolio. As a result, they are subject to capital gains tax.
Taxation of digital loans
It is possible to pledge a digital asset as collateral to obtain other digital assets or a (recognized) currency [euro, dollar…], against payment of interest.
In itself, the loan does not generate income and therefore taxation, but the possible liquidation of digital assets as repayment is considered an exchange between the cryptocurrency deposited as collateral and the borrowed asset :
- If the borrowed asset is a digital asset, no capital gain is calculated.
- If the borrowed asset is a legal tender, it is a transfer that entails taxation on the portfolio’s overall capital gain.
Taxation of crypto-currencies for businesses
Managing cryptocurrencies for a company is no different from managing accounts in any other legal tender, except that accounting entries need to be much more detailed.
Receipt or payment of an invoice
It is necessary to indicate the invoice amount in euros, as well as the number of “tokens” [Bitcoin ou autres] and the exchange rate used to calculate the exchange rate.
Note: There is no official conversion rate for cryptocurrencies, so it’s advisable to use an average price from several reputable platforms, and keep the prices used.
Convert cryptocurrency to euro
The conversion of the cryptocurrency should be considered as a disposal of a crypto asset, resulting in a capital gain [ou une moins-value] according to the difference in price between the date of acquisition and the date of disposal.
Note : It is necessary to calculate the capital gain [ou moins-value] for each operation, and to keep the supporting calculation. In France, two calculation methods are accepted: FIFO or PEPS (First In, First Out) and CUMP. [Coût Unitaire Moyen Pondéré]
Year-end closing
At the end of the tax year, it is necessary to make an entry for the difference in valuation of the cryptocurrency account, comparing its value in legal tender [somme des factures encaissées — somme des factures payées] with its estimated value [quantité de jetons sur le compte multipliée par le taux de conversion du jour].
Note: Unrealized capital gains are not taken into account when calculating the company’s taxable income.
Note : The capital loss, to be considered as a provision for exceptional or financial risks, is not currently deductible.
Company account obligations
It is absolutely mandatory for companies wishing to use digital assets to have an account with a recognized Digital Asset Service Provider (DASP).
Although there is no legal obligation to do so, it is still recommended to use a French platform, for reasons of transparency and traceability.
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