Context

More than one in ten French people will hold digital assets in 2023. While the number of holders of crypto-assets is stagnating in neighbouring countries, this figure is growing steadily in France.

This development is in line with the growth of a sector that is now well established in France, with a network of companies that includes numerous start-ups and major international players.

France has been able to leverage a number of advantages to attract companies and encourage the development of Web 3.0 projects. In particular, it has created an ad hoc legal framework applicable to services in this new asset category.

In addition, from 2019, an innovative tax regime has been established setting out the rules for taxing capital gains on digital assets made by individuals.

This regime, set out in Article 150 VH bis of the French General Tax Code, was designed to simplify taxpayers' returns and the tax authorities' monitoring of transactions. Its main feature is the neutralisation of exchanges between digital assets, which are treated as intercalary transactions. The taxpayer is therefore only liable for tax when the digital assets are sold for official currency or when the crypto-assets are used to acquire goods or services.

However, the tax framework has remained essentially unchanged since this initial stage, while new uses and practices have diversified considerably in recent years.

The 2024 survey conducted by KPMG and the Ipsos Institute for Adan reveals that a higher proportion of French people (34%) believe that the tax system is unsuitable for crypto-assets than in neighbouring countries. In comparison, only 21% of the British, 23% of the Germans and Dutch and 30% of the Italians surveyed felt that their national tax system was not appropriate for this type of investment.

Added to this challenge are those of companies that are resorting to increasingly innovative practices using digital assets. These innovations, which enable companies to finance themselves on the market or attract talent, are sometimes difficult to understand under existing rules, and the tax framework is a source of a great deal of uncertainty.

The purpose of this report is to highlight some of these difficulties with a view to proposing concrete solutions for adapting the tax and accounting framework applicable to crypto-assets in France. It is based on an analysis of practices and difficulties observed by the industry. As such, it aims to put forward concrete recommendations to enhance the legal certainty of taxpayers and the clarity of tax rules.

Company taxation and accounting 

Taxation of the allocation of digital assets to contributors to a project 

Blockchain and crypto-assets offer particularly innovative mechanisms for businesses. The creation of tokens, which can be fully customised, can be used to finance projects, run services or even directly involve stakeholders in a project and attract talent.

The value of the tokens issued is linked to the many parameters surrounding the issue of the tokens and is often linked to the success of the company.

The accessibility and attractiveness of this mechanism enable a growing number of investors to support companies they believe in, to participate in their financing and, in this way, to boost the economy.  

At the same time, it is common practice in the Web 3.0 sector for people who contribute to the development of the company's project (IT developers, for example) to be rewarded with tokens. However, contributors with employee status are generally excluded from this form of profit-sharing because of the uncertainties surrounding the tax and social security treatment of such awards. 

For employees, the allocation of tokens is considered as a benefit in kind for which social security contributions are paid immediately. However, if the company grants the tokens when the project is at a preparatory stage, or if the tokens are not listed on marketplaces, it is very difficult to put a value on them, and the employee generally wants to keep them in order to support the company's project over the long term.

In addition, the tokens allocated may be non-transferable during a blocking period (commonly known as "vesting") sometimes lasting up to three years. This practice is consistent with the desire to have a long-term stake in the company's project.

Between the date on which the tokens are granted and the date on which they are released, their value can vary considerably. The company therefore faces considerable uncertainty over the corresponding charges if the value of the benefit in kind subject to social security contributions is determined on the date on which the tokens are freely available (or worse, when the employee sells the tokens).

As a result of these considerations, salaried employees are regularly excluded from token allocation schemes, even though this mechanism is designed to reward all individuals who have contributed to a company's success.

To enable employees to receive tokens, Adan suggests that the tax and social consequences of a company's plan to allocate tokens to employees, service providers and founders be made more secure.

In order to provide greater legal certainty, consideration could be given to introducing a model agreement, the consequences of which would have been subject to an opinion from URSSAF and the tax authorities. The model could provide for the allocation of tokens to employees on the basis of objective criteria (for example, objective allocation on the basis of seniority, remuneration, identical vesting conditions, etc.) and define a method for valuing the tokens that is definitively fixed on the date of the allocation plan.

The aim would be to rule on the conditions to be met by a company in order to have a token allocation plan and to set out the tax and social consequences. The following system is proposed:

The allocation of fees, the value of which is that of the date on which the company allocates them, is considered to be a benefit in kind subject to personal income tax and social security contributions.

  • If the tokens are allocated to the employee before they are first offered for sale to the general public, it should be possible for them to be valued at cost by the company and to take account of the blocking period. 
  • If the tokens are subject to vesting, i.e. they are blocked for a given period, the benefit in kind is taxable at the end of this blocking period, for the value that the tokens had at the date of allocation.
  • Capital gains realised in the event of subsequent sale of the tokens by the employee are taxed in accordance with article 150 VH bis of the CGI (tax regime for digital assets), it being specified that the acquisition price is increased by the value of the benefit in kind. 

A contractual solution of this kind, with consequences secured by the public authorities (URSSAF, tax authorities), would provide sufficient clarity for issuing companies to make allocations to their employees.

Taxation of sales of tokens by an issuer

Initial Coin Offerings (ICOs) are still an innovative financing mechanism that is widely used in the Web 3.0 sector, and one that would benefit from being democratised in other industries to stimulate business growth. An ICO can be defined as "a fund-raising operation in which a company in need of financing issues tokens, to which investors subscribe mainly with crypto-currencies. These tokens may enable them to access the company's products or services in the future. "

This type of transaction has many advantages for both companies and investors, and today has an established legal and accounting framework. However, with the development of this practice, uncertainties have arisen, particularly regarding its tax treatment. 

Recognition of proceeds from the sale of tokens 

Autorité des normes comptables ("ANC") regulation no. 2018-07 of 10 December 2018 defined a framework for the accounting treatment of token issuance transactions. Indeed, the issuer of the tokens must account for the sums received in return for the sale of said tokens according to the rights and obligations attached to them (Article 619-4 of the General Chart of Accounts).

⇒ There are three situations in this respect: 

  • If the tokens have the characteristics of a repayable debt, they are recorded under borrowings and similar liabilities;
  • If the tokens represent services still to be performed or goods still to be delivered, under an explicit or implicit commitment by the issuer, they are recognised as deferred income;
  • Otherwise, if there are no explicit or implicit obligations, the sums collected are considered to have been definitively acquired by the issuer and are recognised as income.

Quite often, the issuer makes an implicit commitment to acquirers to develop a platform, protocol or service offering. To this end, the issuer publishes a whitepaper detailing the issuing operation and its objectives. 

In its infra-regulatory comments, the ANC confirms that such a commitment should lead the issuer to record the sums collected in return for the sale of the tokens as "deferred income". This treatment is consistent with the spirit of a token issue used to finance a long-term project. However, doubts remain about the method to be used to recognise this income. 

The development of a Web 3.0 project can be long and complex, which is why token financing is the preferred method. A technology project developed over several years leads to the provision of complex services. In this respect, it is similar to a long-term contract, as defined by article 622-1 of the General Chart of Accounts. The preferred accounting method for long-term contracts is "percentage of completion", i.e. as expenses are incurred in relation to the initial development budget. This method is also the most consistent with the economic reality of financing a large-scale technological project, as the sums allocated are intended to be used exclusively for investments that do not generate any immediate wealth for the company. When this method is used for accounting purposes, the principle of tax-accounting connection should ensure that it has full effect for tax purposes.

However, this method appears to be accepted for tax purposes only as a tolerance by the tax authorities for construction and public works companies and shipbuilding companies (BOI-BIC-PDSTK-10-10 no. 180).

In order to be more faithful to the economic reality of the project financing and development operation, the tax effects of the preferential "percentage of completion" accounting method should be recognised when this method is used by the company for accounting purposes.

In addition, this method would enable the tax burden borne by the company to be brought into line with the reality of its enrichment when the sums collected are intended to finance long-term investments.

Personal taxation 

Taxation of income derived from participation in the operation of a blockchain

Mining is the activity that consists of securing the network and validating transactions in exchange for rewards in the form of digital assets allocated directly by the protocol. This activity is essential to the operation of the blockchain and relies on the intervention of users known as validators (or miners). 

The tax treatment of rewards from mining activity has been the subject of various developments since it first appeared in administrative doctrine in 2014 and has given rise to a number of questions regarding the timing and regime at which the income is taxed.

The decision of the Conseil d'État on 26 April 2018 (8th - 3rd joint chambers, 4178092) then clarified that income from the disposal of mining rewards comes under the heading of Bénéfices Non Commerciaux (BNC). This decision therefore implicitly clarifies the point at which this income must be considered as available and therefore taxable, with the disposal constituting the triggering event for taxation as BNC. 

However, this ruling came before the tax regime for the disposal of digital assets under Article 150 VH bis of the French General Tax Code, which is silent on the issue of mining income. Today, the relationship between the two regimes and changes in practices on the crypto-asset markets have once again raised questions about the taxable event and the tax regime to be applied to this activity. 

This situation of uncertainty is detrimental to both taxpayers and the authorities, and is a source of litigation. 

Clarifying the regime applicable to activities associated with mining therefore seems necessary in order to avoid any disputes and preserve France's competitiveness in the Web 3.0 field. However, such an approach requires a precise analysis of the behaviour of holders of digital assets and a better definition of the activities covered by the notion of mining, or "participation in the operation of the system" according to the terminology used in 2018 by the Conseil d'État. 

A distinction to be made between operators and passive participants

Several methods are used to validate and secure transactions on a blockchain. On the Bitcoin blockchain, for example, the network is made secure by mining, with a "Proof of Work" consensus mechanism. In this case, the only person who validates the block of transactions receives the reward. 

More recently, the "proof-of-stake" validation method, also known as staking, has emerged. This method, used in particular on the Ethereum blockchain, requires a deposit of digital assets (or stake) to be designated as a validator by the protocol.

In practice, staking involves two categories of participants receiving rewards: 

  • the validators who check the transactions, using their own resources, and
  • indirect participants who simply deposit crypto-assets with validators via the protocol, without directly validating transactions and creating blocks.

In the questions and answers published by the European Securities and Markets Authority (ESMA) on the application of the Regulation on markets in crypto-assets (MiCA), a distinction is made between different types of staking. In particular, it points out that in some cases, also known as staking-as-a-service, the staking service is provided for a fee by intermediaries who undertake to stake crypto-assets on behalf of their clients. In this situation, the authority says customers commit their assets to a liquidity pool in exchange for a return.

While the term "staking" is commonly used to describe direct or indirect participation in securing and operating a blockchain by means of a proof-of-stake security mechanism, the distinction between active participants (validators) and passive participants is nonetheless fundamental from a legal and tax point of view. 

The remuneration of the indirect participant corresponds to remuneration for the provision of digital assets and not to an exploited activity. 

The BNC regime does not therefore appear to be suitable for this case, which needs to be treated differently from a tax point of view to ensure a clear and simple framework. We have identified the following difficulties in particular.

Adan suggests revising the current tax doctrine, which is perceived as ambiguous, both for taxpayers and for the development of decentralised finance. It advocates a clear distinction between active validation activities and passive participation in the process of validating transactions in digital assets.

The BNC regime is adapted to business income. However, the passive income of the indirect participant corresponds to remuneration for the provision of digital assets and not to an activity. Therefore, while taxation under the BNC category is appropriate for direct income-generating activities, such as those carried out by validators, it is not appropriate for taxpayers who are not directly involved in validating transactions. The latter, by simply making assets available for validation, should be subject to the system of taxation on disposal, which would be in line with the objective of simplification and tax clarity sought by the legislator and reflected in article 150 VH bis.

The complexity of the crypto-asset market calls for a simple framework that is easy for taxpayers to understand

⇒ Simplifying tax law and making it easier to understand 

Taxation of rewards as NLC on the date of collection requires the taxpayer to monitor each transaction and value it in real time. 

While this kind of accounting monitoring is understandable for a profit-making business, it is very complex to implement for a private individual.

For indirect participants, these rewards are passive income generated without any intervention on their part. They may receive several hundred per day, sometimes for very modest amounts.  

The frequency of exchange transactions has led the legislator to neutralise them for private individuals. In the same spirit of simplification, deferring the taxation of rewards to the sale of digital assets, as suggested by the Conseil d'Etat, would be a pragmatic and effective solution that is in keeping with the spirit of the tax regime for crypto-assets. 

It should be remembered that for the majority of taxpayers, this income can represent thousands of transactions per year for an overall annual income that is often very low. 

⇒ Price volatility that could penalise users generating passive income from long-term investments

For indirect participants, the deposit is an investment transaction rather than a short-term investment.

The very high volatility of prices can lead to taxpayers being penalised for the period between collection and disposal of the rewards. While they are taxed immediately on collection, they do not have the euro funds to meet the tax, unless they sell the crypto-assets immediately and regularly.

Due to the evolution of mining methods, the ever-increasing frequency of transactions on crypto-asset markets and the volatility of prices, taxing the rewards linked to each transaction at the time they are collected would pose numerous difficulties, both for taxpayers and for the tax authorities. 

Adan therefore suggests that the taxation of rewards should be set at the time of transfer, for individuals who participate passively in mining. This would have the effect of making taxation coincide with the receipt of income in euros, in the spirit of the solution adopted by the legislator for article 150 VH bis of the CGI. It would also be a simplification solution in line with the spirit of the ad hoc regime in that article, which provides for deferring taxation of income from exchanges between crypto-assets to the date of transfer. 

Finally, this approach would simplify the tax return for taxpayers, while maintaining the integrity of the tax process.
⇒ A solution that makes it possible to tackle the new use cases associated with liquid staking

Liquid staking tokens ("LSTs") are a recent development in the field of digital assets, designed to reduce users' exposure to the uncertainties of income from mining. 

The value of these tokens is based partly on changes in the price of a reference digital asset and partly on changes in the staking rewards attached to that asset. In this way, the value of the LST increases in line with the rewards, without the holder receiving them directly.

In the case of an exchange or transfer of an LST, taxing the rewards on collection would mean determining precisely the proportion attributable to the rewards and the proportion linked to the change in share price, which in practice is very complex both for taxpayers and for the tax authorities responsible for checking returns.

Due to the evolution of mining methods, the ever-increasing frequency of transactions on crypto-asset markets and the volatility of prices, taxing the rewards linked to each transaction at the time they are collected would pose numerous difficulties, both for taxpayers and for the tax authorities. 

Adan therefore suggests that the taxation of rewards should be set at the time of transfer, for individuals who participate passively in mining. 

This approach would have the effect of making taxation coincide with the receipt of income in euros, in the spirit of the solution adopted by the legislator for article 150 VH bis of the CGI. 

This would also be a simplification solution in keeping with the spirit of the ad hoc regime set out in this article, which provides for deferring the taxation of income from exchanges between crypto-assets to the date of transfer. 

Finally, this approach would simplify the tax return for taxpayers, while maintaining the integrity of the tax process.

For validators directly operating a mining business, the rewards would be taxable as BNC as soon as they were received.

The need to adapt the transfer regime 

For validators operating a direct mining business, the taxation of rewards would therefore take place in two stages.

It works as follows: 

  • When the rewards are collected, the gain corresponding to the value of the crypto-assets on the date of collection is taxable as income from business;
  • When these crypto-assets are sold, a capital gain is taxable under the rules of article 150 VH bis of the CGI (taxed at the overall rate of 30%).

If prices fall between these two events, taxing the staking rewards exposes taxpayers to a loss, or even to the payment of a tax higher than the reward actually received. While this risk may be incurred in other types of investment, the tax regime for crypto-assets is specific in that it does not allow taxpayers to carry forward capital losses. 

⇒ Ex: In April 2023, Adrien makes a staking deposit and receives 1.5 reward ethers with a market value of €2,250, which he decides to keep in his digital asset portfolio. In 2024, the value of the ether has fallen to €700. Adrien therefore has only €1,050 left in his staking portfolio, although he will still be liable for BNC tax on the €2,250 in income he is assumed to have earned in 2023. Adrien will not be able to offset his capital loss against any other capital gains. 

Adan has already brought this issue to the attention of the legislator during previous budget debates. In order to contain such a risk, it would appear necessary to review the tax relationship between the potential losses incurred by taxation on the collection of staking rewards on the one hand, and the non deferral of capital losses incurred on the disposal of crypto-assets on the other.

In order to bring these two regimes into line with each other, capital losses on the sale of digital assets should be deductible (i) against overall income, particularly where the loss arises from the sale of rewards, and (ii) against capital gains in subsequent years.

Tax treatment of electronic money tokens 

To offset price volatility, the crypto-asset market has seen the emergence of stablecoins, a type of crypto-asset designed to maintain a stable value, usually backed by a single fiat currency.

Stablecoins are digital assets under French law

Article L.54-10-1 of the French Monetary and Financial Code (CMF) defines digital assets as "Any digital representation of a value that is not issued or guaranteed by a central bank or by a 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".  

In France, stablecoins (crypto-assets whose value is stable because they are backed by a legal tender or other assets) therefore meet the definition of digital assets. From a tax point of view, this means that the exchange of a stablecoin for another digital asset is tax neutral. In fact, this is the whole point of the tax regime for digital assets created in 2019: transactions are not taxed as long as they remain in the virtual economy; they are taxed when the investor returns his or her funds to the real economy. 

Some stablecoins are crypto-assets under the European MiCA regulation

Drawing heavily on the French regime established in 2018, the European regulation on crypto-asset markets (MiCA) will come into force in December 2024. The French Web 3.0 sector is delighted at the prospect of this European harmonisation.  

The MiCA regulation lists various types of crypto-assets, including stablecoins, which are subdivided into two categories: 

  • Electronic Money Token (EMT) when the stablecoin is backed by a legal tender; 
  • Asset Refrenced Tokens (ART) when they are backed by other assets. 

In the context of this report, we will focus solely on electronic currency tokens, which are defined as follows in the MiCA regulation: "a type of crypto-asset that aims to maintain a stable value by reference to the value of an official currency".

MiCA recognises that EMTs are fully-fledged crypto-assets, which must be distinguished from electronic money. The text even states that "despite their similarities, electronic money and crypto-assets referring to an official currency differ in certain important aspects."

Consequently, e-money tokens should not be considered as e-money or funds, and the entry into force of the MiCA regulation should - logically - have no impact on the application of the regime set out in Article 150 VH bis of the CGI, i.e. the exchange of one crypto-asset for another is tax neutral. 

Electronic money tokens should not be considered as electronic money in the broadest sense.

Other debates underway at EU level are causing concern in the sector, particularly if they have tax consequences. 

On 28 June 2023, the European Commission submitted a proposal to revise the Payment Services Directive (PSD) and establish a Payment Services Regulation (PSR) in order to unify the regulatory framework for payment services within the European Union. However, without taking into account the necessary nuances introduced by the Regulation on markets in crypto-assets (MiCA), these texts treat electronic money tokens (EMT) extensively as electronic money. 

The result of such an approach would be to equate EMTs with "funds". This assimilation is problematic in that it does not correspond to the reality of EMTs and the legal and tax regimes applicable to crypto-assets. On a related note, it is also likely to create an additional layer of regulation for issuers and firms handling EMTs, even though they are already subject to MiCA regulation. However, this point will not be addressed in this report.

Adan is calling for the legal uncertainties currently being debated at European level not to have consequences at French level. The tax regime for digital assets has been recognised for its innovative nature and, being a national matter, it should not be modified as a result of Community debates.

Amend Schedule 2086 relating to the declaration of capital gains 

Schedule 2086 must be completed in order to declare capital gains on digital assets. It can only contain a limited number of transactions (5 on the paper form, 20 on the online return). These limitations are a source of complexity for taxpayers, as it is not uncommon for an individual to exceed this number of transactions in a year.

Adan therefore suggests that the tax authorities modify their form, at least the digital version, to allow at least a hundred transactions a year. In this context, it is proposed to : 

  • expressly provide for the possibility of grouping transactions by day or by order (as several orders can generate numerous transactions on a platform); or 
  • introduce a supplementary schedule that would allow more flexible and detailed recording of transactions. This appendix would facilitate the management of declarations exceeding the current thresholds, by offering the possibility of documenting all the necessary transactions without restrictions as to number.

About Adan 

Adan brings together more than 200 professionals - new players and established companies - who develop innovation and use cases for the decentralised web in all areas of the economy on a daily basis. By removing the obstacles to their growth and competitiveness, Adan is working towards the emergence and influence of French and European champions in the service of our digital sovereignty. Adan promotes an appropriate, proportionate and catalytic framework for innovation, as well as a better understanding of new blockchain technologies, crypto-assets and their opportunities. 

Contacts:  

Faustine Fleuret, President and CEO - [email protected] 

Mélodie Ambroise, Director of Strategy and Institutional Relations - [email protected]  

Alizée Van Den Schrieck, Legal Affairs Officer: [email protected] 

Website: https://adan.eu
Twitter : @adan_asso