This article will explore the potential impact of the latest proposal on the cryptocurrency market based on an analysis of the current French tax law system.
Written by: TaxDAO
1. Introduction
On November 16, 2024, the French Senate proposed an amendment (Amendment I-128) during the 2025 budget negotiations, aiming to rename the "Real Estate Wealth Tax" to "Non-productive Wealth Tax" and expand the tax scope to include various assets, including digital assets, taxing such "non-productive capital gains." The types of income covered by this tax regulation specifically refer to the appreciation that exists only on paper, such as the increase in value of cryptocurrencies or other assets due to market price rises, but which has not yet been converted back to euros or other fiat currencies through actual transactions. In short, when the market value of an asset rises, and the holder has not yet converted it to cash through a sale, this unrealized appreciation is considered non-productive capital gains and falls within the tax scope. This article will explore the potential impact of the latest proposal on the cryptocurrency market based on an analysis of the current French tax law system.
2. Background of the Amendment
2.1 Overview of the Current French Tax System
2.1.1 French Capital Gains Tax and Real Estate Wealth Tax
In France, according to the current French Tax Code 150U, capital gains realized from the transfer of real estate are subject to capital gains tax (Impôt sur la Plus-Value, CGT), with rates ranging from approximately 19% to 34.5%, depending on the holding period and other factors. The longer the holding period, the more tax relief is available, with a potential exemption after holding for more than 22 years. If the property is the primary residence, capital gains are exempt from tax. Additionally, a social tax must be paid, with rates and relief provisions similar to those of CGT, but with a longer relief period. The total tax rate decreases with the holding period, reflecting the principle of tax fairness.
The Real Estate Wealth Tax (Impôt sur la Fortune Immobilière, IFI) is an annual tax levied on the net value of real estate assets, applicable to individuals exceeding a specific net wealth threshold. From Article 954 of the Tax Code, France details the standards and scope for the collection of the Real Estate Wealth Tax. This tax replaced the previous solidarity wealth tax (ISF) and taxes French residents on their global real estate assets, while non-French residents are only taxed on real estate within France. The IFI tax rate is progressive, ranging from 0.5% to 1.5%, aimed at curbing real estate speculation and promoting market stability.
2.1.2 Taxation of Cryptocurrencies
France has precedents in cryptocurrency taxation. As early as 2019, the country introduced rules for taxing digital assets under Article 150 VH bis of the General Tax Code. If a taxpayer resides in France and earns profits exceeding 305 euros from selling Bitcoin or any other cryptocurrency within a year, they are required to pay taxes. In 2023, France introduced a progressive tax system. Starting from the 2023 tax year (reported in 2024), taxpayers with income in the lowest tax bracket (i.e., annual income below 27,478 euros) will enjoy certain tax benefits, with the maximum tax rate reduced to 28.2%, while the usual rate is 30%.
Currently, in France, capital gains from the sale of cryptocurrencies are taxed at a flat rate of 30%. Additionally, cryptocurrency-to-cryptocurrency transactions are not considered taxable events in France, a tax policy that encourages investors to diversify their portfolios while avoiding immediate tax burdens from frequent trading.
2.2 Taxation of Unrealized Gains on Crypto Assets
Currently, French investors are only required to fulfill their tax obligations when they sell digital assets and make a profit. However, according to the amendment, any increase in the value of crypto assets will be taxed even without a sale.
This proposed new regulation comes at a time when countries around the world are discussing and practicing regulations and taxation of digital assets. Currently, governments are actively exploring effective ways to incorporate cryptocurrencies into their tax systems and adopting different tax strategies based on their national conditions. Some countries tend to treat cryptocurrencies as assets similar to traditional investments for taxation, while others have established specific tax rules for these emerging assets. For example, the Czech Republic unanimously agreed to exempt capital gains tax on Bitcoin held for more than three years; the Danish Tax Law Committee proposed a 42% tax on unrealized capital gains from cryptocurrencies starting in 2026, applicable to all cryptocurrencies purchased since their inception, allowing for the offset of cryptocurrency investment losses against gains; in the United States, taxes are only required when cryptocurrencies are sold for profit; Italy has raised the capital gains tax on cryptocurrencies from 26% to 42% to increase government revenue; Kenya announced that it collected over $77 million in taxes from 384 cryptocurrency traders in the first half of 2023 and plans to strengthen its tax system and technological applications to improve tax efficiency… In this context, the recent proposal by the French Senate to tax unrealized gains on cryptocurrencies is not a spur-of-the-moment decision but a necessary move to align with the global trend of constructing and improving the taxation and regulation system for cryptocurrencies.
3. Core Content of the Amendment
3.1 Renaming and Expanding the Tax Base
The amendment renames the previously real estate-focused wealth tax to "Non-productive Wealth Tax" and expands the taxable objects from solely real estate to include undeveloped real estate, liquid assets, financial assets, tangible movable property, intellectual property, and digital assets. This renaming and expansion aim to broaden the tax base of the wealth tax (IFI) to better align the tax system with the needs of France's economic development. In addition to real estate, which was previously the only taxable base, the taxable objects of France's wealth tax will now also include digital assets (such as cryptocurrencies) and liquid assets in bank accounts, provided they are not used for economic activities. Furthermore, the amendment provides tax incentives for economically productive investments, such as constructing rental apartments or supporting small and medium-sized enterprises (SMEs).
3.2 Inclusion of Digital Assets
Notably, the amendment explicitly includes digital assets in the tax scope, using Bitcoin as an example of a digital asset. In the content added after Article 3 of the amendment, it specifically mentions that digital assets are included in the scope of the Non-productive Wealth Tax. Specifically, in the modification of "I.–A.–General Tax Code, Volume I, Part One, Chapter Two, Section Two," Article 965 is explicitly stated as follows: "The tax base of the Non-productive Wealth Tax consists of the net value on January 1 of the year of assets directly or indirectly held by the persons described in Article 964 and their minor children (when legally managing the property of these children): … According to this amendment, the following will be specifically included in the reformed Non-productive Wealth Tax base: undeveloped real estate not used for economic activities… liquid funds and similar financial investments… tangible movable property… digital assets (such as Bitcoin)…" This means that, from a legal standpoint, digital assets have been explicitly recognized as part of non-productive wealth and are subject to the corresponding wealth tax. At this point, cryptocurrencies like Bitcoin will be taxed both at the time of transfer for realized gains and annually on January 1 based on their net market value. Of course, the net market value here is the value after deducting the relevant costs of the property.
Regarding the effective date, the amendment requires that from 2025, the Non-productive Wealth Tax will replace the Real Estate Wealth Tax. This means that once the amendment comes into effect, starting in 2025, digital assets will officially be included in the scope of the Non-productive Wealth Tax. It is important to emphasize that while digital assets are included in the scope of the Non-productive Wealth Tax, the amendment does not specify a tax threshold for digital assets. However, based on the overall content of the amendment, raising the tax threshold is an important direction for reform, thereby avoiding taxing families that cannot be classified as wealthy but are only affected by inflation. Additionally, the amendment does not mention any tax exemption provisions for digital assets. However, considering that the purpose of the amendment is to encourage productive investment and may provide tax relief for certain specific productive investment activities, it is worth further attention and discussion whether the French government will grant tax exemptions or reductions for certain types of digital asset investment income in the future.
4. Controversies Surrounding Unrealized Capital Gains Tax
In fact, there has been ongoing debate among countries about whether unrealized capital gains should be taxed, with the core issue being whether taxing unrealized, potential gains rather than realized gains is fair or effective.
4.1 Advantages of Unrealized Capital Gains Tax
Some argue that one advantage of taxing unrealized gains is the potential to increase tax revenue. For example, estimates from the Federal Reserve in the United States indicate that the wealthiest 1% of Americans hold over 50% of all unrealized capital gains. A research team from the University of Pennsylvania further estimates that taxing these gains could raise up to $500 billion in tax revenue over ten years. Additionally, there are three main benefits to taxing unrealized gains. First, it addresses the issue of high-net-worth individuals avoiding taxes by holding assets. Many high-net-worth individuals escape tax obligations because most of their wealth is locked in stocks, bonds, real estate, and other investments. Some utilize a common tax avoidance strategy known as "buy, borrow, die," where they invest in appreciating assets, hold them for life, fund their lifestyle through borrowing without selling these assets, and then pass them on to heirs. Even general investors can indefinitely defer taxes by not selling assets. This strategy allows them to accumulate significant wealth without paying taxes. Second, it alleviates wealth inequality issues and promotes social equity through tax redistribution. Third, it enhances economic efficiency by encouraging investors to allocate funds to more productive areas.
4.2 Disadvantages of Unrealized Capital Gains Tax
The disadvantages of unrealized capital gains tax mainly manifest in four areas. First, there are challenges regarding the accuracy of asset valuation, especially for illiquid and less liquid assets, where market prices are difficult to obtain or frequently fluctuate, leading to complex, time-consuming, and costly valuations. Second, it may trigger liquidity issues for individuals whose wealth is primarily tied up in non-cash assets, as taxation may lead them to face cash flow problems, forcing them to sell assets or incur debt to meet tax obligations. Third, there are concerns about double taxation, where the same asset is taxed for appreciation during the holding period and again upon sale for realized capital gains, potentially discouraging long-term investment. Fourth, there are potential negative economic impacts, including suppressing the market for illiquid assets, increasing investor risk aversion, reducing investment in high-growth potential and volatile assets, and possibly leading to capital outflows to countries with more favorable tax regimes, thereby weakening national competitiveness. In short, the implementation of 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 express concerns about the fairness of this amendment. Unlike real estate or stocks, cryptocurrencies lack consistent valuation metrics and often experience high volatility. This policy may prompt investors to shift towards purchasing stablecoins or using overseas exchanges to avoid heavy tax burdens.
5.1.1 Increased Tax Burden
Cryptocurrency holders will face the pressure of double taxation. On one hand, they need to pay taxes on realized gains when selling cryptocurrencies; on the other hand, they also need to pay wealth tax annually based on the net market value of their cryptocurrencies. This will significantly increase the actual costs of holding and trading cryptocurrencies for investors.
5.1.2 Intervention in Investment Behavior
The increased tax burden may prompt cryptocurrency holders to adjust their investment strategies. Some long-term holders may choose to sell their cryptocurrencies early to avoid future tax burdens; while short-term investors may consider their investment strategies more cautiously to balance returns with tax costs. Although supporters of unrealized capital gains tax argue that paper profits provide taxpayers with an economic advantage and can therefore be taxed "fairly," the reality is often different for highly volatile assets like cryptocurrencies, as their price increases can turn negative within days or even hours. In such cases, unrealized capital gains tax may force investors to liquidate assets at unfavorable times, effectively resulting in losses.
5.2 Impact on the Market
The increased tax burden may reduce market liquidity for cryptocurrencies. Taxing unrealized gains creates liquidity issues for investors who may not have sold their assets but face tax obligations, which is particularly concerning in the highly volatile cryptocurrency market where asset values can fluctuate significantly. Investors may experience cash flow pressure before tax deadlines, and if they do not have enough cash to pay taxes, they may be forced to sell cryptocurrencies, which can strain their finances and lead to price volatility in the cryptocurrency market. Additionally, some investors may reduce their trading frequency or choose to exit the market due to excessive tax burdens, resulting in an overall decline in market liquidity.
5.3 Global Impact
From a global perspective, as one of the important member states of the European Union, France's policy changes often have a demonstration effect on the entire European and even global cryptocurrency market. Adjustments to France's cryptocurrency tax policy may prompt other countries to reassess their tax frameworks. For example, the EU is currently developing a unified regulatory framework for the cryptocurrency market (MiCA), which reflects the consensus among EU countries regarding tax policies. France's amendment may encourage other EU countries or even the EU as a whole to consider tax policies similar to those of France. France's approach may also influence other major economies such as the United States and Japan, potentially altering the tax environment for global cryptocurrency investors.
6. Conclusion
As the cryptocurrency market matures, effectively regulating and reasonably taxing it has become a common challenge faced by governments worldwide. Although this amendment is still in its preliminary stages and has not yet formally become law, the underlying tax logic and policy direction are already significant enough to attract the attention of cryptocurrency holders and industry practitioners. Globally, regardless of whether a country establishes a capital gains tax separately, capital gains are regarded as an important object of income tax. From the practices of various countries' tax laws, some countries and regions (such as Singapore and Hong Kong) have set capital gains tax rates at 0% to attract financial capital; while in countries where the tax rate is not zero, taxation typically occurs only when capital gains are "realized," meaning when paper profits are converted into actual profits. Most countries follow this practice regarding the treatment of capital gains from cryptocurrencies, and even among academic and policy researchers of cryptocurrencies, few propose taxing unrealized gains. Therefore, France's tax amendment stands out as particularly "prominent" and unique.
Despite the distinctiveness of this amendment, we can still interpret it from two dimensions: its supporting measures and policy objectives. On one hand, taxing unrealized capital gains on cryptocurrencies does not exist in isolation but complements the mechanism for offsetting gains and losses in cryptocurrencies; for example, the amendment requires taxing "net gains" through unrealized capital gains tax. On the other hand, this tax law amendment aligns with France's recent trend of strengthening regulation over cryptocurrencies. This refers to the unprecedented challenges that the decentralized nature of cryptocurrencies poses for tax administration, and taxing unrealized gains can simplify the tax administration of cryptocurrencies to some extent, becoming an important means for the government to enhance its intervention and regulation of cryptocurrencies.
Although this amendment may impose a certain tax burden on cryptocurrency holders, it is significant for improving the tax system and promoting healthy market development, highlighting the phenomenon of governments reconsidering how to tax cryptocurrencies. In the future, as global regulatory scrutiny of cryptocurrency taxation continues to strengthen, we look forward to seeing a more standardized and transparent cryptocurrency market.
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