Investing in digital assets has been offering excellent returns for a few years and is attracting more and more investors.
However, their virtual nature raises many questions about their taxation, especially with regard to cryptocurrencies.
What about unrealized capital gains? Can we pay a supplier?
The 2019 Finance Act has clarified the tax treatment of capital gains on sales of digital assets. This one distinguishes two very different cases:
- investments made by individuals
- investments made by companies
The taxation of cryptocurrencies for individual investors
Before going into details, it is necessary to underline some important points about the digital capital gains of a private estate:
- Capital gains are only applicable to the transfer of digital assets in exchange for an official currency (euro, dollar or other) or the purchase of a good or service.
Ex. 1 Transferring Bitcoin to obtain another cryptocurrency does not result in a capital gain
Example 2 payment in Bitcoin for a Tesla car leads to 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 disposal of an asset representing 50% of the digital portfolio results in taxation on 50% of the capital gain of the portfolio, not of the asset sold.
- The overall capital gain of a tax household on the sale of digital assets is subject to a flat tax of 30% %, including social security contributions.
Case of passive income: mining, lending, staking
All these operations consist in generating income in a passive way by locking an asset:
- Use of the computing power of a computer in mining
- Lending cryptocurrency as liquidity against interest in the case of lending
- Locking of 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 reported in the year they are received.
However, such passive income obtained as a digital asset may be considered part of the digital portfolio and acquired for no consideration. The calculation of the capital gain will then take place at the time of their transfer.
Marketing operation: airdrops and token distributions
In order to increase their visibility, some platforms offer free digital assets to their customers under certain conditions.
Ex: Donation of x number of digital assets for any account opening, use of a service, referral of a new customer.
The Finance Act distinguishes two different cases:
- Windfall gains, which cannot be anticipated and are not recurring, are not taxed
- Gains paid for an action taken by the individual must be reported as a NBI.
Digital asset donations
The legislation does not differentiate between digital and real assets, and the latter are therefore subject to the usual gift tax and benefit from the same deductions.
When these digital assets are sold in the future, the capital gain will be calculated based on their value on the day the gift is received, and not on the day they were acquired by the donee.
The gains from trading digital assets
These derivatives are defined by a contract between the parties (most often: the 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 separate from other assets in the digital portfolio. Consequently, 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 borrowing 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 results in taxation on the overall capital gain of the portfolio.
The taxation of cryptocurrencies for businesses
Managing cryptocurrencies for a company is no different than managing accounts in any other legal tender, except that the accounting entries must be much more detailed.
Receipt or payment of an invoice
It is necessary to indicate the amount of the invoice in euros, as well as the number of “tokens” [Bitcoin ou autres] and the rate used to calculate the exchange rate
Note: There is no official conversion rate for cryptocurrencies, so it is advisable to use an average of the rate of several reputable platforms, and keep the rates used.
Converting cryptocurrency to euro
The conversion of the cryptocurrency should be considered as a disposal of crypto asset, resulting in a capital gain [ou une moins-value] according to the price difference 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 methods of calculation are accepted: the FIFO or PEPS [First In, First Out] and the CUMP [Coût Unitaire Moyen Pondéré]
Closing of the accounting period
At the end of the tax year, it is necessary to make the entry of the valuation difference 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: The unrealized capital gain is not taken into account for the calculation of the company’s taxable income.
Note : The capital loss, to be considered as a provision for exceptional or financial risks, is not deductible for the time being.
Corporate Account Requirement
It is absolutely mandatory for the company wishing to use digital assets to have an account with a recognized Digital Asset Service Provider (DAP).
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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