Author: TaxDAO

1. Introduction

On November 16, 2024, the French Senate proposed an amendment (Amendment I-128) during the 2025 budget negotiations. The amendment aims to rename the "real estate wealth tax" to the "unproductive wealth tax" and expand the scope of taxation to a variety of assets, including digital assets, to tax such "unproductive capital gains." The types of gains covered by this tax provision are those that exist only on paper, such as increases in the market price of cryptocurrencies or other assets, but which have not yet been converted back into euros or other fiat currencies through actual transactions. . Simply put, when the market value of an asset increases but the holder has not converted it into cash through sale, this unrealized appreciation is considered an unproductive capital gain and is taxed. This article will analyze the current French tax law system and explore its potential impact on the cryptocurrency market based on the latest proposals.

2. Background of the amendment 2.1 Overview of the current French tax system

2.1.1 French real estate capital gains tax and real estate wealth tax

In France, according to the current French tax code 150U, real estate transfer is realized Capital gains are subject to capital income tax (Impôt sur la Plus-Value, CGT), with tax rates ranging from approximately 19% to 34.5%, depending on the holding period and other factors. The longer you hold it, the more tax deductions you will enjoy, and it may be tax-free if you hold it for more than 22 years. If the real estate is the principal residence, capital gains are exempt from tax. In addition, social tax is also required. Its tax rate and exemption regulations are similar to CGT, but the exemption period is longer. The total tax rate decreases as the holding period increases, reflecting the principle of tax fairness.

The Real Estate Wealth Tax (Impôt sur la Fortune Immobilière, IFI) is an annual tax on the net value of real estate assets that applies to individuals who exceed a certain net wealth threshold. Starting from Article 954 of the Tax Code, France has specified the standards and scope of real estate wealth tax collection. This tax replaces the previous solidarity wealth tax (ISF) and taxes French residents on their real estate assets worldwide, but non-French residents only pay tax on real estate in France. The IFI tax rate adopts a progressive system, ranging from 0.5% to 1.5%, aiming to curb real estate speculation and promote market stability.

2.1.2 Taxation of Cryptocurrencies

France has precedents in taxing cryptocurrencies. Back in 2019, the country introduced rules for taxing digital assets under Article 150 VH bis of the General Tax Code. Taxpayers residing in France will need to pay tax if they make more than €305 in profits from the sale of Bitcoin or any other cryptocurrency in a year. In 2023, France added a progressive tax system. from 2023 Starting from the tax year (2024 reporting year), taxpayers with income in the lowest tax bracket (i.e. annual income below 27,478 euros) will enjoy certain tax benefits, with their maximum tax rate reduced to 28.2%, compared with the usual rate of 30 %.

Currently, in France, capital gains from the sale of cryptocurrencies are taxed at a flat rate of 30%. In addition, in France, cryptocurrency-to-cryptocurrency transactions are not considered a taxable event, and this tax can encourage investors to diversify their portfolios while avoiding the immediate tax burden arising from frequent transactions.

2.2 Unrealized gains on crypto assets may be taxed

Currently, French investors only need to fulfill tax obligations when they sell digital assets and make a profit. Under the amendment, any increase in the value of crypto assets will be taxed even if there is no profit from the sale.

This proposed new regulation comes at a time when countries around the world are discussing and practicing on the supervision and taxation of digital assets. Currently, various countries are actively exploring effective ways to incorporate cryptocurrencies into their tax systems and adopting different tax strategies based on their respective national conditions. Some prefer to tax cryptocurrencies as assets similar to traditional investments, while others have specific tax rules for these emerging assets. For example, the Czech Republic exempted Bitcoins held for more than 3 years from capital gains tax with unanimous parliamentary approval; the Danish Tax Law Commission recommended a 42% tax on unrealized capital gains from cryptocurrencies starting in 2026, and the new tax will apply to self-cryptocurrencies. All cryptocurrencies purchased since the birth of the currency and allow cryptocurrency investment losses to be offset against gains; while in the United States, taxes are only required when selling cryptocurrencies and making profits; Italy has increased the cryptocurrency capital gains tax from 26% to 42% to increase revenue; Kenya announced that it collected more than $77 million in taxes from 384 cryptocurrency traders in the first half of 2023, and plans to strengthen the tax system and technology applications to improve tax collection efficiency... In this context, the French Senate recently Advocating for the taxation of unrealized gains from cryptocurrencies is by no means a whim, but an inevitable move in line with the global trend of constructing and improving the taxation and regulatory system for cryptocurrencies.

3. Core content of the amendment 3.1 Renaming and expansion of tax targets

The amendment renames the wealth tax originally targeted at real estate as "unproductive wealth tax" and expands the tax targets from single real estate To include unbuilt real estate, liquid assets, financial assets, tangible personal property, intellectual property and digital assets and other fields. This renaming and expansion initiative aims to expand the tax base of the wealth tax (IFI) and make the tax system more consistent with the needs of France's economic development. In addition to real estate, which was previously the sole basis for taxation, France’s wealth tax will now include digital assets (such as cryptocurrencies) and liquid assets in bank accounts, provided they are not used for economic activity. Additionally, the amendment provides for taxation of productive investments in the economyConcessions, such as building rental apartments or supporting small and medium-sized enterprises (SMEs).

3.2 Inclusion of digital assets

What is particularly noteworthy is that the amendment clearly includes digital assets within the scope of taxation and uses Bitcoin as an example of a digital asset. In the content added after Article 3 of the amendment, it is specifically mentioned that digital assets are included in the taxation scope of unproductive wealth tax. Specifically, in the modification of “I.–A.–General Tax Law, Volume 1, Part 1, Chapter 2-2, Part 4, Chapter 2-2”, Article 965 is clearly stipulated as follows: “The tax base of unproductive wealth tax shall be determined by The net value on January 1 of the current year of the assets held directly or indirectly by the persons referred to in Article 964 and their minor children (when they are lawfully managing the property of these children) and falling into one of the following categories: Composition: ...Under this amendment, the following will be specifically included in the reformed unproductive wealth tax base: undeveloped real estate not used for economic activity...liquid capital and similar financial investments...tangible personal property...digital assets ( Such as Bitcoin)..." This means that, according to legal provisions, digital assets have been clearly regarded as part of unproductive wealth and need to pay corresponding wealth taxes. At this time, cryptocurrencies such as Bitcoin will be taxed like real estate, both on the realized gains at the time of transfer and on the net market value on January 1 of each year. Of course, the net market value here is the value after deducting the costs associated with the property.

In terms of effective time, the amendment requires that the real estate wealth tax be replaced with an unproductive wealth tax from 2025. This means that once the amendment finally takes effect, starting in 2025, digital assets will be officially included in the taxation scope of unproductive wealth tax. It should be emphasized that although digital assets are included in the taxation scope of unproductive wealth tax, the amendment does not specify the tax threshold for digital assets. However, judging from the overall content of the amendment, raising the tax threshold is an important reform direction, so as to avoid taxing those households that cannot be classified as wealthy but are subject to tax only because they are affected by inflation. In addition, the amendment does not mention tax exemption provisions for digital assets. However, considering that the purpose of the amendment is to encourage productive investment and may grant tax relief to some specific productive investment activities, it is worth further research whether France will grant tax exemption or tax relief to certain types of digital asset investment income in the future. Pay attention and discuss.

4. Controversy surrounding unrealized capital gains tax

In fact, there has been controversy in various countries over whether unrealized capital gains should be taxed. The core issue lies in the taxation of unrealized and potential gains rather than those already realized Whether it is fair or efficient to tax the realized gains.

4.1 Advantages of Unrealized Capital Gains Tax

Some people believe that one advantage of taxing unrealized gains is that it can increase tax revenue. In the United States, for example, Federal Reserve estimates show that the richest 1% of Americans hold more than 50% of all unrealized capital gains. The University of Pennsylvania research team further estimated that taxing these gains mayEnough to raise up to $500 billion in taxes over 10 years. Beyond this, there are three major benefits to taxing unrealized gains. The first is to solve the problem of high net worth individuals avoiding taxes by holding assets. Many high-net-worth individuals are shielded from tax liability because much of their wealth is locked up in assets such as stocks, bonds, real estate and other investments. Some of these people take advantage of a common tax avoidance strategy known as "buy, borrow, die" where they invest in appreciating assets, hold them for life, borrow to fund their lifestyle without selling the assets, and then pass them on To the heirs. Even the average investor can defer paying taxes indefinitely by not selling assets. This strategy allowed them to accumulate large amounts of wealth without paying taxes. The second is to alleviate the problem of wealth inequality and promote social equity through tax redistribution. The third is to improve economic efficiency and encourage investors to invest funds in more productive areas.

4.2 Disadvantages of unrealized capital gains tax

The disadvantages of unrealized capital gains tax are mainly reflected in four aspects. One is the challenge of asset valuation accuracy, especially illiquid and less liquid assets whose market prices are not easily accessible or frequently fluctuate, resulting in complex, time-consuming and expensive valuations. Second, it may cause liquidity problems. For individuals whose wealth is mainly tied to non-cash assets, taxation may cause them to face cash flow problems and have to sell off assets or borrow debt to meet tax liabilities. The third is the concern of double taxation. The same asset is taxed on appreciation during the holding period and taxed again on the realization of capital gains when sold, which may inhibit long-term investment. The fourth is the potential negative economic impact, including suppressing the illiquid asset market, increasing investor risk aversion, reducing investment in high-growth potential and volatile assets, and may lead to capital outflows to countries with more favorable taxes, thus weakening competitiveness. In short, the implementation of the unrealized capital gains tax faces challenges such as valuation difficulties, liquidity issues, double taxation risks and potential negative economic impacts.

5. Impact on cryptocurrency holders and the market 5.1 Impact on cryptocurrency holders

Many French cryptocurrency investors have expressed concerns about the fairness of the amendment. Unlike real estate or stocks, cryptocurrencies lack consistent valuation metrics and often experience high volatility. This may prompt investors to turn to buying stablecoins or using overseas exchanges to avoid heavy tax burdens.

5.1.1 Increased tax burden

Cryptocurrency holders will face double tax pressure. On the one hand, they are required to pay taxes on realized gains when selling cryptocurrencies; on the other hand, they are also required to pay annual wealth taxes based on the net market value of cryptocurrencies. This will significantly increase the actual cost for investors to hold and trade cryptocurrencies.

5.1.2 Intervention in investment behavior

The increase in tax burden may prompt cryptocurrency holders to adjust their investment strategies. Some long-term holders may choose to sell cryptocurrencies in advance to avoid future tax pressure; while short-term investors mayConsider their investment strategies more carefully to balance benefits with tax costs. While proponents of the unrealized capital gains tax argue that paper profits already provide a financial advantage to the taxpayer and therefore can be taxed “fairly,” however, for highly volatile assets like cryptocurrencies, the reality is often not the case because of their Price increases can turn negative within days or even hours. In such cases, unrealized capital gains taxes may force investors to liquidate assets at an unfavorable time, incurring losses in disguise.

5.2 Impact on the market

The increase in tax burden may reduce the market liquidity of cryptocurrencies such as cryptocurrencies. Taxing unrealized gains can create liquidity problems for investors who may not have sold their assets but face tax liabilities, which is particularly concerning in cryptocurrency markets where asset values ​​can fluctuate significantly. Investors have certain cash flow pressure before the tax deadline. If there is not enough cash to pay taxes, investors have to choose to sell cryptocurrencies. This will not only make investors financially stressed, but also may lead to fluctuations in cryptocurrency market prices. . At the same time, some investors may reduce trading frequency or choose to exit the market due to excessive tax burdens, resulting in a decrease in overall market liquidity.

5.3 Global Impact

From a global perspective, France, as one of the important members of the European Union, its changes will often have a demonstration effect on the cryptocurrency market throughout Europe and even the world. France’s changes to cryptocurrency taxation may trigger other countries to re-examine their own tax frameworks. For example, the EU is currently formulating unified cryptoasset market (MiCA) regulations. The MiCA framework is the EU's consensus on taxation. This French amendment may prompt other EUs and even the EU as a whole to consider taxation similar to France. France’s approach may also affect other major economies such as the United States and Japan, which may change the tax environment for global cryptocurrency investors.

6. Conclusion

As the cryptocurrency market becomes increasingly mature, how to effectively regulate and reasonably tax it has become a common challenge faced by all countries. Although this amendment is still in its preliminary stage and has not yet officially become a legal provision, the tax logic and guidance behind it are enough to arouse deep concern among cryptocurrency holders and industry practitioners. Globally, capital gains are regarded as an important subject of income tax, regardless of whether a separate capital gains tax is established. Judging from the tax law practices of various countries, in order to attract financial capital, some regions and regions (such as Singapore and Hong Kong) set the capital gains tax rate to 0%; and where the tax rate is not zero, it is usually only when the capital gains are "realized". That is, taxation is only imposed when book income is converted into actual income. Regarding the treatment of capital gains from cryptocurrencies, most also follow this practice. Even among academics and researchers of cryptocurrencies, few have proposed taxing book gains from cryptocurrencies. Therefore, this tax amendment in France is particularly "outstanding" and unique.

Although this amendment appears to be inconsistent withIt is different, but we can still interpret it from the two dimensions of its supporting measures and goals. On the one hand, the taxation of unrealized capital gains on cryptocurrencies does not exist in isolation, but is complementary to the profit and loss offset mechanism of cryptocurrencies. For example, this amendment requires the imposition of unrealized capital gains tax on "net gains." On the other hand, this tax law amendment is consistent with France’s recent trend of strengthening cryptocurrency regulation. This means that the decentralized nature of cryptocurrency has brought unprecedented challenges to tax collection and administration, and taxing unrealized gains can simplify the tax collection and administration of cryptocurrency to a certain extent and become an important step in strengthening the intervention and management of cryptocurrency. important means of supervision.

Although this amendment may bring certain tax pressure to cryptocurrency holders, it is of great significance to improving the tax system and promoting the healthy development of the market, highlighting the need for countries to reconsider the taxation of cryptocurrency. tax phenomenon. In the future, as tax regulations on cryptocurrency continue to strengthen globally, we look forward to seeing a more standardized and transparent cryptocurrency market.