Author: TaxDAO
1. Introduction
On November 16, 2024, the French Senate proposed an amendment (Amendment I-128) in the 2025 budget negotiations, which aims to rename the "Real Estate Wealth Tax" as the "Non-Productive Wealth Tax" and expand the scope of taxation to a variety of assets including digital assets, and tax such "non-productive capital gains". The types of gains covered by this tax provision specifically refer to those parts of the value added that only exist on the books, such as the value added of cryptocurrencies or other assets due to market price increases, but these values have not yet been converted back into euros or other legal currencies through actual transactions. In short, when the market value of an asset rises and the holder has not yet converted it into cash by selling it, this part of the unrealized value added is regarded as non-productive capital gains and is included in the scope of taxation. This article will analyze the current French tax system and explore its potential impact on the cryptocurrency market in combination with 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 150U of the current French Tax Code, capital gains realized from the transfer of real estate are subject to capital gains tax (Impôt sur la Plus-Value, CGT), with a tax rate ranging from approximately 19% to 34.5%, depending on the holding period and other factors. The longer the holding period, the more tax relief you will enjoy, and holding for more than 22 years may be tax-free. If the real estate is the main residence, the capital gains are tax-free. In addition, social taxes are payable, with rates and exemptions similar to CGT, but with a longer exemption period. The total tax rate decreases with the number of years held, reflecting the principle of tax fairness.
Impôt sur la Fortune Immobilière (IFI) is an annual tax on the net value of real estate assets, applicable to individuals above a certain net wealth threshold. From Article 954 of the Tax Code, France has detailed the criteria and scope for immovable wealth tax. This tax replaces the previous solidarity wealth tax (ISF) and is imposed on the real estate assets of French residents worldwide, but non-French residents are only required to pay tax on real estate in France. The IFI tax rate is progressive, ranging from 0.5% to 1.5%, and is intended to curb real estate speculation and promote market stability. 2.1.2 Taxation of Cryptocurrencies France already has precedents in the taxation of cryptocurrencies. Back in 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, he or she will be subject to tax if the profit earned from the sale of Bitcoin or any other cryptocurrency exceeds €305 in a year. In 2023, France added a progressive tax system. Starting from the 2023 tax year (2024 reporting), taxpayers with income in the lowest tax bracket (i.e., annual income below €27,478) will enjoy certain tax benefits, with the maximum tax rate reduced to 28.2%, while the usual rate is 30%. Currently, capital gains from the sale of cryptocurrencies in France are taxed at a flat rate of 30%. In addition, in France, cryptocurrency-to-cryptocurrency transactions are not considered taxable events. This tax policy can encourage investors to diversify their portfolios while avoiding the immediate tax burden caused by 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. According to the amendment, any increase in the value of crypto assets will be taxed even if there is no sale profit.
This proposed new regulation comes at a time when countries around the world are discussing and practicing the regulation and taxation of digital assets. At present, governments are actively exploring effective ways to incorporate cryptocurrencies into their tax systems and adopt different tax strategies according to their national conditions. Some countries tend to tax cryptocurrencies as assets similar to traditional investments, while others have formulated special tax rules for these emerging assets. For example, the Czech Republic, with the unanimous consent of the parliament, exempts capital gains tax on Bitcoin held for more than three years; the Danish Tax Law Committee recommends a 42% tax on unrealized capital gains on cryptocurrencies from 2026. The new policy will apply to all cryptocurrencies purchased since the birth of cryptocurrency, and allow cryptocurrency investment losses to offset gains; in the United States, taxes are only required when cryptocurrencies are sold and profits are made; Italy has increased cryptocurrency capital gains tax from 26% to 42% to increase government revenue; Kenya announced that it had collected more than US$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... Against this background, the recent French Senate's advocacy of taxing unrealized gains on cryptocurrencies is by no means a whim, but an inevitable move in line with the global trend of building and improving the cryptocurrency tax and regulatory system.
3. The core content of the amendment
3.1 Renaming and expansion of tax objects
The amendment renamed the wealth tax originally targeted at real estate as "non-productive wealth tax" and expanded the tax objects from single real estate to include unbuilt real estate, liquid assets, financial assets, tangible movable property, intellectual property rights and digital assets. This renaming and expansion is aimed at expanding the tax base of wealth tax (IFI) and making the tax system more in line with the needs of French economic development. In addition to real estate, which was previously the only basis for taxation, the tax objects of France's wealth tax will now include digital assets (such as cryptocurrencies) and liquid assets in bank accounts, provided that they are not used for economic activities. In addition, the amendment also provides tax incentives for economically productive investments, such as building rental apartments or supporting small and medium-sized enterprises (SMEs).
3.2 Inclusion of Digital Assets
It is particularly noteworthy that the amendment explicitly includes digital assets in the scope of taxation, and uses Bitcoin as an example of digital assets. In the content added after Article 3 of the amendment, it is specifically mentioned that digital assets are included in the taxation scope of non-productive wealth tax. Specifically, in the amendment to "I.-A.-General Tax Code, Volume I, Part I, Title IV, Chapter II-2", Article 965 is clearly stipulated as follows: "The tax base of non-productive wealth tax consists of the net value of assets belonging to one of the following categories held directly or indirectly by the persons referred to in Article 964 (when they legally manage the property of these children) on January 1 of the current year: ... 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 the legal provisions, digital assets have been clearly defined as part of non-productive wealth and are subject to corresponding wealth tax. At this time, cryptocurrencies such as Bitcoin will be taxed on the realized gains at the time of transfer, just like real estate, 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 relevant costs of the property.
In terms of the effective time, the amendment requires that the real estate wealth tax be replaced by the non-productive wealth tax from 2025. This means that once the amendment finally takes effect, starting from 2025, digital assets will be officially included in the taxation category of non-productive wealth tax. It should be emphasized that although digital assets are included in the taxation category of non-productive wealth tax, the amendment does not make specific provisions for the tax threshold of digital assets. However, from the overall content of the amendment, the increase in the tax threshold is an important reform direction, thereby avoiding taxation on households that cannot be classified as wealthy but are taxable only due to inflation. In addition, the amendment does not mention the tax exemption provisions for digital assets. However, considering that the purpose of the amendment is to encourage productive investment and may grant tax exemptions for some specific productive investment activities, whether the French government will grant tax exemption or tax reduction treatment to certain types of digital asset investment income in the future is worthy of further attention and discussion.
4. Controversy surrounding unrealized capital gains tax
In fact, there has been controversy among countries on whether unrealized capital gains should be taxed. The core issue is whether it is fair or effective to tax unrealized, potential gains rather than 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. For example, in the United States, estimates by the Federal Reserve Board show that the richest 1% of Americans hold more than 50% of all unrealized capital gains. The research team at the University of Pennsylvania further estimated that taxing these gains might be able to raise up to $500 billion in taxes within 10 years. In addition, there are three major benefits to taxing unrealized gains. First, it addresses the problem of high-net-worth individuals avoiding taxes by holding assets. Many high-net-worth individuals are exempt from tax obligations because most of their wealth is locked up in assets such as stocks, bonds, real estate and other investments. Some of them have taken advantage of a common tax avoidance strategy, namely "buy, borrow and die", where they invest in appreciated assets, hold them for life, finance their lifestyles by borrowing without selling these assets, and then pass them on to their heirs. Even ordinary investors can postpone taxes indefinitely by not selling assets. This strategy allows them to accumulate a lot of wealth without paying taxes. Second, it alleviates the problem of wealth inequality and promotes social equity through tax redistribution. Third, it improves economic efficiency and encourages investors to invest their 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. First, there are challenges in asset valuation accuracy, especially for illiquid and illiquid assets, whose market prices are not easily accessible or fluctuate frequently, making valuation complex, time-consuming and expensive. Second, it may cause liquidity problems. For individuals whose wealth is mainly tied up in non-cash assets, taxation may cause them to face cash flow problems and have to sell assets or take on debt to meet tax liabilities. Third, there are concerns about double taxation. The same asset is taxed for appreciation during the holding period and taxed again for realized capital gains when it is sold, which may inhibit long-term investment. Fourth, there are potential negative economic impacts, including suppressing the illiquid asset market, increasing investor risk aversion, reducing investment in high-growth potential and volatile assets, and possibly leading to capital outflows to countries with more favorable taxation, thereby weakening national competitiveness. In short, the implementation of the unrealized capital gains tax faces challenges such as difficult valuation, liquidity problems, 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 indicators and often experience high volatility. This policy 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 need to pay taxes on realized gains when they sell cryptocurrencies; on the other hand, they will also need to pay wealth taxes based on the net market value of cryptocurrencies every year. 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 may consider their investment strategies more carefully to balance gains and tax costs. Although those who support unrealized capital gains tax believe that book profits have provided taxpayers with economic advantages and can therefore be taxed "fairly", this is often not the case for highly volatile assets such as cryptocurrencies, as their price gains may turn negative in a few days or even hours. In such cases, unrealized capital gains tax may force investors to liquidate assets at unfavorable times, resulting in 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 cause liquidity problems for investors who may not have sold their assets but face tax obligations. This is particularly worrisome in the cryptocurrency market, where asset values can fluctuate dramatically. Investors face certain cash flow pressures before the tax deadline. If they do not have enough cash to pay the tax, they will have to sell their cryptocurrencies, which will not only make investors financially strained, but also lead to price fluctuations in the cryptocurrency market. At the same time, some investors may reduce their trading frequency or choose to exit the market due to excessive tax burdens, resulting in a decline in overall market liquidity.
5.3 Global Impact
From a global perspective, as one of the important members of the European Union, France's policy changes often have a demonstration effect on the cryptocurrency market throughout Europe and even the world. France's adjustment of its cryptocurrency tax policy may trigger other countries to re-examine their own tax frameworks. For example, the EU is currently developing a unified crypto-asset market (MiCA) regulation. The MiCA framework is a consensus among EU countries on tax policies. This amendment by France may prompt other EU countries and even the EU as a whole to consider similar tax policies as 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 matures, how to effectively regulate and reasonably tax it has become a common challenge faced by governments around the world. Although this amendment is still in its early stages and has not yet officially become a legal provision, the tax logic and policy orientation behind it are enough to arouse the deep concern of cryptocurrency holders and industry practitioners. Globally, regardless of whether a country has established a separate capital gains tax, capital gains are regarded as an important taxable object of income tax. From the perspective of tax law practices in various countries, some countries and regions (such as Singapore and Hong Kong, China) set the capital gains tax rate at 0% in order to attract financial capital; in countries with non-zero tax rates, taxes are usually levied only when capital gains are "realized", that is, when book gains are converted into actual gains. Most countries also follow this practice in dealing with capital gains of cryptocurrencies. Even among academic and policy researchers of cryptocurrencies, few have proposed to tax the book gains of cryptocurrencies. Therefore, this tax amendment in France is particularly "outstanding" and unique. Although this amendment is different, we can still interpret it from two dimensions: its supporting measures and policy objectives. On the one hand, the taxation of unrealized capital gains of cryptocurrencies does not exist in isolation, but complements the profit and loss offset mechanism of cryptocurrencies. For example, the amendment requires the unrealized capital gains tax to be levied on "net income". On the other hand, this tax law amendment is consistent with the policy trend of strengthening the regulation of cryptocurrencies in France in recent years. This means that the decentralized nature of cryptocurrencies has brought unprecedented challenges to tax collection and management, and the taxation of unrealized gains can simplify the tax collection and management of cryptocurrencies to a certain extent, and become an important means for the government to strengthen intervention and supervision of cryptocurrencies.
Although the amendment may bring certain tax pressure to cryptocurrency holders, it is of great significance to improve the tax system and promote the healthy development of the market, highlighting the phenomenon that governments around the world are reconsidering the way they tax cryptocurrencies. In the future, as the global supervision of cryptocurrency taxation continues to strengthen, we look forward to seeing a more standardized and transparent cryptocurrency market.
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