French taxation of income from the sale of digital assets - The thorny issue of stablecoins

French taxation of income from the sale of digital assets - The thorny issue of stablecoins

By FrenchLegalAspect | FLA | 8 May 2021


Hello to all readers of these lines,

Today, I would like to give you a new reflection on the legislative framework of crypto-assets in French law.

You may have already read my other publications on the subject, these articles being drawn from different parts of a research paper written in 2018. More than 3 years after it was written, a real legal framework has been adopted both in terms of the regulations applicable to its actors and the taxation applicable to its users.

Although some problems remain, in particular the difficulty for some players to access bank accounts, as banks remain reluctant to this sector of activity, the framework is now fixed, drawing on the numerous French and European works on the subject.

From a tax point of view, the rules are fairly clear, even if one could criticise the complexity of the calculation methods and the restrictive nature of the reporting obligations for "small" users.

The evolution of the various digital assets registered on blockchain however renews the questions and, from a legal point of view, to wonder about the legal qualification of these assets, on which, as you will see below, the tax regime of the income derived from them depends.

In this respect, I invite you to refer to my previous articles which, even if they are old, are still relevant in terms of their legal nature.

The tax framework for income derived from the transfer of digital assets by an individual

There is a before and an after to 2019, since the Pact Law of 22 May 2019 created a specific, "sui generi" regime for capital gains on the sale of digital assets, which it also had to define.

Without going into the details of the calculation, which is complex and requires the intervention of a legal professional due to the youth of the legal regime and the technology itself, before this law, no legal regime existed, leading to this income being taxed on the basis of Article 150 UA of the General Tax Code (https://www.legifrance.gouv.fr/codes/article_lc/LEGIARTI000037988296/)  in the category of capital gains on movable property not subject to another category (the so-called "broom" category).

The Pact Law created a specific regime for capital gains on the sale of digital assets, Article 150 VH bis of the General Tax Code (https://www.legifrance.gouv.fr/codes/article_lc/LEGIARTI000038612228/), referring to digital assets falling under the definition of Article L.54-10-1 of the Monetary and Financial Code (https://www.legifrance.gouv.fr/codes/article_lc/LEGIARTI000038509570/) :

"For the application of this chapter, digital assets include:

1° The tokens mentioned in Article L. 552-2, excluding those that fulfil the characteristics of the financial instruments mentioned in Article L. 211-1 and the savings bonds mentioned in Article L. 223-1 ;

2° Any digital representation of a value that is not issued or guaranteed by a central bank or public authority, that is not necessarily attached to a legal tender and that does not have the legal status of a currency, but that is accepted by natural or legal persons as a means of exchange and that can be transferred, stored or exchanged electronically. "

This definition encompasses, by its general definition, different realities and imposes a functional analysis.

Thus the category of digital assets is composed of tokens, defined in Article L.552-2 of the Monetary and Financial Code (https://www.legifrance.gouv.fr/codes/article_lc/LEGIARTI000038509545/) and subject to Article 150 VH Bis, and may fall under other categories if they incorporate or are subject to different regulations, namely those of financial instruments under L.211-1 of the Monetary and Financial Code (https://www.legifrance.gouv.fr/codes/article_lc/LEGIARTI000032469968/) and of savings bonds under L.223-1 of the Monetary and Financial Code (https://www.legifrance.gouv.fr/codes/article_lc/LEGIARTI000039260567/).

Therefore different qualifications, which imply to check the nature of each crypto and the rights they incorporate:

Tokens

Tokens are, according to Article L.552-2 of the Monetary and Financial Code (https://www.legifrance.gouv.fr/codes/article_lc/LEGIARTI000038509543) :

"For the purposes of this chapter, a token is any intangible asset representing, in digital form, one or more rights that can be issued, recorded, stored or transferred by means of a shared electronic recording device that makes it possible to identify, directly or indirectly, the owner of said asset. "

However, if they incorporate the characteristics of financial instruments or cash vouchers, they will fall under their regime and the applicable taxation will be different:

" I. - Subject to the provisions specific to professional profits, capital gains realised by natural persons domiciled for tax purposes in France within the meaning of Article 4 B, directly or through an intermediary, on the sale for valuable consideration of digital assets mentioned in Article L. 54-10-1 of the Monetary and Financial Code or rights relating thereto, are subject to income tax under the conditions set out in this Article.

II. - A. - The provisions of I of this article do not apply, for the year of exchange, to transactions involving the exchange of digital assets defined in I or rights relating thereto, without a cash payment.

B. - Persons carrying out transfers for which the sum of the prices, as defined in A of III, does not exceed 305 € during the tax year, excluding the transactions mentioned in A of this II, are exempt.

III. - The gross capital gain or loss realised at the time of the transfer of goods or rights mentioned in I is equal to the difference between, on the one hand, the transfer price and, on the other hand, the product of the total acquisition price of the entire portfolio of digital assets by the quotient of the transfer price on the overall value of this portfolio.

A. - The transfer price to be taken into account is the actual price received or the value of the consideration obtained by the transferor, where applicable including the balance he has received or reduced by the balance he has paid at the time of the transfer.

The transfer price is reduced, on the basis of supporting documents, by the costs incurred by the transferor in connection with the transfer.

B. - The total acquisition price of the portfolio of digital assets is equal to the sum of the prices actually paid in legal tender for all acquisitions of digital assets or rights relating thereto made prior to the transfer and the value of each of the services and goods, other than digital assets or rights relating thereto delivered in exchanges that have benefited from the tax deferral provided for in A of II, including any balancing payments made, delivered in consideration for digital assets or rights relating thereto prior to that same transfer.

In the event of a free acquisition, the acquisition price to be used is the value used to determine the transfer tax or, failing that, the actual value of the digital assets or the rights relating to them determined at the time they entered the transferor's assets.

The total acquisition price determined by application of the first two paragraphs of this B is reduced by the sum of the fractions of initial capital contained in the value or price of each of the various transfers of digital assets or rights relating thereto, whether free of charge or for consideration, excluding exchanges that have benefited from the deferral of taxation provided for in A of II, that have been carried out previously. Where one or more exchanges with balancing payments received by the transferor have been made prior to the taxable transfer, the total acquisition price is reduced by the amount of the balancing payments.

C. - The overall value of the portfolio of digital assets is equal to the sum of the values, assessed at the time of the taxable transfer, of the various digital assets and related rights held by the transferor prior to the transfer.

IV. - Gross capital losses incurred during a tax year in respect of disposals of assets or rights mentioned in I, other than those falling within the scope of II, are deducted exclusively from gross capital gains of the same kind realised in respect of that same year.

V. - A. - The income tax corresponding to the capital gain mentioned in this article is paid by the natural person who, directly or through an intermediary, makes the transfer.

The taxpayers shall enter on the annual declaration provided for in Article 170 the total amount of the capital gain or loss realised in respect of the taxable transfers of the year. They shall attach to this declaration an appendix in accordance with a model drawn up by the administration, on which they shall mention and evaluate all the capital gains or losses realised on the occasion of each of the taxable disposals made during the year or the prices of each of the disposals exempted pursuant to B of II.

B. - A decree determines the declarative obligations incumbent on the taxpayers and interposed persons mentioned in I.

VI. - (Repealed). "

We can retain from this definition that any representation of a value that is registered on a blockchain allowing the identification of the owner (Monero and certain blockchains raise the question here) is a digital asset, except if it incorporates certain rights falling under other categories.

Digital tokens legally excluded from being a digital asset

Financial instruments

Financial securities - equity, debt, bonds etc issued by a company with share. For example, the bond issue by Société Générale of a secured bond in the form of a security token on a public blockchain (https://www.societegenerale.com/fr/actualites/newsroom/societe-generale-emet-la-premiere-obligation-securisee-sous-forme-de-security) is the first successful experience of this type.

Financial contracts - These are defined in Article D.211-1 of the Monetary and Financial Code. The regime applies, not to digital assets, but to their financial and non-financial underlyings, such as binary options, futures or CFDs.

Other possible qualification

« Bons de Caisses » - These do not fall under the category of financial instruments and are an autonomous category. Bons de caisse are defined in Article L.223-1 of the Monetary and Financial Code as (https://www.legifrance.gouv.fr/codes/article_lc/LEGIARTI000039260567/) :

« Bons de caisse are non-negotiable registered securities with an undertaking by a trader to pay at a specified time, issued in return for a loan. The conditions of their issue and their placing on sale or in circulation, by way of a public offer other than that aimed exclusively at qualified investors mentioned in 1° of Article L. 411-2 or that relating to a loan equal to or greater than an amount set by decree, are governed by the provisions of this chapter.

The savings bonds may not, in the same issue, confer identical debt rights for the same nominal value. »

The eternal question of stablecoins

A slightly different question from other crypto assets (understand all the legal categories presented above and recorded on a shared electronic recording device, thus a blockchain).

We will directly set aside the financial qualifications, unsuitable for a stablecoin, to focus on that of simple tokens falling under the category of digital assets defined in Article L.552-2 and subject to taxation under Article 150 VH Bis, or that of virtual currency defined in Article L.315-1 of the Monetary and Financial Code (https://www.legifrance.gouv.fr/codes/article_lc/LEGIARTI000027007558/).  

In practice, if stablecoins are qualified as digital assets, then inter-coupon transactions between digital assets are not taxed according to the regime for individuals provided for in Article 150 VH Bis.

Conversely, if stablecoins are qualified as electronic currencies, then the conversion of a digital asset into a stablecoin will be considered as a taxable event under the same regime for individuals

The qualification of digital asset raises a real question of tax contribution, and of discrimination in the face of transfers in real state currency such as proposed by exchanges and which will necessarily have to be addressed in the face of the rise of banks offering services in crypto currencies and proposing payment cards in euros backed by crypto currency accounts.

The qualification of virtual currency is also complicated to justify since it assumes some form of recognition of the legal tender status of stablecoins.

This is impossible for USD-indexed stablecoins, and would require the calculation of a new conversion gain when converting USD stablecoins into legal tender euros.

Regarding euro-linked stablecoins such as the recent Lugh (https://www.lesechos.fr/finance-marches/banque-assurances/casino-veut-ouvrir-la-voie-au-paiement-en-magasin-par-crypto-1299200), qualification as a virtual currency is also difficult since they are not issued by a central bank, which is historically a prerogative of public power. Whether one agrees or not with this prerogative, our global legal system is organised according to this presupposition, as other instruments of value exchange have always existed concurrently with state currencies without this attribute being recognised.

In the future, this question will have to be answered for a new type of stablecoin like AMPL and its rebase mechanism where the price tends to be stable thanks to fluctuations in the number of units of the protocol, allowing each user to keep, for the value of the AMPL deposited at any given time, the same value indexed to the dollar. Currently, other stablecoins are backed by a weighted countervalue of a colaterisation ratio, either in state currency or in digital assets like Bitcoin or Ethereum.

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FrenchLegalAspect
FrenchLegalAspect

Law student talking about crypto-assets in a (mostly french) legal point of view and other stuff.


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French Legal Aspects of crypto-assets and other.

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