Author: TaxDAO
1. Introduction
On November 16, 2024, the French Senate proposed an amendment (Amendment I-128) during the 2025 budget negotiations, which aims to rename the "real estate wealth tax" to "non-productive wealth tax" and expand the tax base to include various assets, including digital assets, and tax these "non-productive capital gains." The types of income covered by this tax regulation specifically refer to the appreciation that only exists on paper, such as the increase in value of cryptocurrencies or other assets due to market price appreciation, but this appreciation has not yet been converted into euros or other fiat currencies through actual transactions. In other words, when the market value of an asset increases, but the holder has not converted it into cash by selling it, this unrealized appreciation is considered a non-productive capital gain and is included in the tax base. This article will, based on an analysis of the current French tax system, explore the potential impact of the latest proposals on the cryptocurrency market.
2. Background of the Amendment
2.1 Overview of the Current French Tax System
2.1.1 Real Estate Capital Gains Tax and Real Estate Wealth Tax in France
In France, according to the current French Tax Code 150U, the 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 exemptions are available, and holding for more than 22 years may be tax-free. If the real estate is the main residence, the capital gains are exempt from tax. In addition, social security contributions must be paid, with rates and exemption rules similar to CGT, but with a longer exemption period. The total tax rate decreases with the increase in 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 whose net wealth exceeds a certain threshold. From Article 954 of the Tax Code, France has detailed regulations on the collection standards and scope of the real estate wealth tax. This tax replaces the previous solidarity wealth tax (ISF) and taxes the real estate assets of French residents worldwide, but non-French residents only need to pay tax on real estate within France. The IFI tax rate is progressive, 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 the taxation of cryptocurrencies. As early as 2019, the country introduced rules for taxing digital assets based on Article 150 VH bis of the General Tax Code. If a taxpayer is resident in France and earns profits from the sale of Bitcoin or any other cryptocurrency exceeding 305 euros in a year, they are required to pay taxes. In 2023, France has added a progressive tax system. From the 2023 tax year (reported in 2024), taxpayers in the lowest tax bracket (i.e., with annual income below 27,478 euros) will enjoy certain tax benefits, with a maximum tax rate of 28.2%, compared to the usual 30%.
Currently, in France, capital gains from the sale of cryptocurrencies are taxed at a flat rate of 30%. Furthermore, in France, the conversion of cryptocurrencies into other cryptocurrencies is not considered a taxable event, which allows investors to diversify their investment portfolios without immediately incurring a tax burden due to frequent transactions.
2.2 Unrealized Gains on Crypto Assets May Be Taxed
Currently, French investors only need 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 if there is no sale and realized gain.
This proposed new regulation comes at a time when countries around the world are discussing and implementing regulations and taxation on digital assets. Currently, governments are actively exploring effective ways to incorporate cryptocurrencies into their tax systems and adopting different tax strategies based on their own national conditions. Some countries tend to treat cryptocurrencies as similar to traditional investments for taxation purposes, while others have developed specific tax rules for these emerging assets. For example, the Czech Republic has unanimously agreed in parliament to exempt capital gains tax on Bit coins held for more than 3 years; the Danish Tax Council has recommended taxing unrealized capital gains on cryptocurrencies at 42% from 2026, with the new policy applying to all cryptocurrencies purchased since their inception, and allowing cryptocurrency investment losses to be offset against gains; in the United States, taxes are only required when cryptocurrencies are sold and profits are made; Italy has increased the capital gains tax on cryptocurrencies from 26% to 42% to increase government revenue; Kenya has announced that it collected over $77 million in taxes from 384 cryptocurrency traders in the first half of 2023 and plans to strengthen the tax system and technology application to improve tax collection efficiency... Against this background, the recent proposal by the French Senate to tax the unrealized gains on cryptocurrencies is not a passing whim, but an inevitable move to construct and improve the tax and regulatory system for cryptocurrencies in line with global trends.
3. Key Content of the Amendment
3.1 Renaming and Expansion of the Tax Base
The amendment renames the original real estate wealth tax to the "non-productive wealth tax" and expands the tax base from a single real estate to include undeveloped real estate, liquid assets, financial assets, tangible movable property, intellectual property, and digital assets. This renaming and expansion measure aims to broaden the wealth tax (IFI) base, making the tax system more in line with the needs of France's economic development. In addition to real estate, which was previously the sole tax base, the French wealth tax will now also include digital assets (such as cryptocurrencies) and liquid assets in bank accounts, provided they are not used for economic activity. Furthermore, the amendment provides tax incentives for economically productive investments, such as the construction of rental apartments or support for small and medium-sized enterprises (SMEs).
3.2 Inclusion of Digital Assets
Notably, the amendment explicitly includes digital assets in the tax base, using Bit coin 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 tax base of the non-productive wealth tax. Specifically, in the amendment to "I.–A.–Title IV, Chapter II bis of Part I of Book I of the General Tax Code," Article 965 is clearly stipulated as follows: "The tax base of the non-productive wealth tax consists of the net value on January 1 of the year of the assets held directly or indirectly by the persons referred to in Article 964 and their minor children (when they legally manage these children's assets): ... 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 activity... liquid funds and similar financial investments... tangible movable property... digital assets (such as Bit coin)..." This means that, from a legal perspective, digital assets have been clearly defined as part of non-productive wealth and subject to the corresponding wealth tax. At this point, cryptocurrencies like Bit coin will be treated like real estate, subject to both taxation on realized gains upon transfer and annual taxation on the net market value as of January 1. Of course, the net market value here is the value after deducting the relevant costs of the asset.
In terms of the effective time, the amendment requires the replacement of the real estate wealth tax with a non-productive wealth tax from 2025 onwards. This means that once the amendment is finally effective, digital assets will be officially included in the taxation scope of the non-productive wealth tax starting from 2025. It is important to note that although digital assets have been included in the taxation scope of the non-productive wealth tax, the amendment has not made specific provisions on the taxation threshold for digital assets. However, from the overall content of the amendment, the increase of the taxation threshold is an important reform direction, in order to avoid taxing families who cannot be classified as wealthy but are only subject to taxation due to the impact of inflation. In addition, the amendment did not mention the tax exemption provisions for digital assets. However, considering that the purpose of the amendment is to encourage productive investment, and may provide tax incentives for certain specific productive investment activities, it is worth further attention and discussion whether the French government will provide tax exemption or reduction treatment for the income from certain types of digital asset investment in the future.
4. Controversy around Unrealized Capital Gains Tax
In fact, there has been controversy among countries on whether unrealized capital gains should be taxed, the core issue being whether it is fair or effective to tax potential earnings that have not been realized, rather than realized earnings.
4.1 Advantages of Unrealized Capital Gains Tax
It is argued that one advantage of taxing unrealized earnings is that it can increase tax revenue. For example, in the US, the Federal Reserve's estimates show that the wealthiest 1% of Americans hold over 50% of all unrealized capital gains. A research team at the University of Pennsylvania further estimates that taxing these gains could potentially raise up to $500 billion in tax revenue over 10 years. In addition to this, there are three other main benefits of 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 the majority of their wealth is locked up in stocks, bonds, real estate and other investments. Some of them utilize a common tax avoidance strategy of "buy, borrow, die", investing in appreciating assets, holding them for life, funding their lifestyle through borrowing rather than selling these assets, and then passing them on to their heirs. Even ordinary investors can indefinitely defer taxes by not selling their assets. This strategy allows them to accumulate substantial wealth without paying taxes. Second, it can alleviate the problem of wealth inequality by redistributing wealth through taxation. Third, it can improve economic efficiency by encouraging investors to direct their capital to more productive areas.
4.2 Disadvantages of Unrealized Capital Gains Tax
The main drawbacks of the unrealized capital gains tax are manifested in four aspects. First, the challenge of accurate asset valuation, especially for illiquid and less liquid assets, whose market prices are difficult to obtain or often fluctuate, making valuation complex, time-consuming and expensive. Second, it may cause liquidity problems, as for individuals whose wealth is primarily tied up in non-cash assets, taxation may lead them to face cash flow issues, forcing them to sell assets or take on debt to fulfill their tax obligations. Third, the concern of double taxation, where the same asset is taxed for its appreciation during the holding period, and then again when the capital gain is realized upon sale, which may inhibit long-term investment. Fourth, the potential negative economic impact, including suppressing the non-liquid asset market, increasing investor risk aversion, reducing investment in high-growth potential and volatile assets, and potentially leading to capital flight to countries with more favorable tax regimes, thereby undermining national competitiveness. In short, the implementation of the unrealized capital gains tax faces challenges such as valuation difficulties, liquidity issues, the risk of double taxation, and potential negative economic impacts.
5. Impact on Cryptocurrency Holders and the Market
5.1 Impact on Cryptocurrency Holders
Many French cryptocurrency investors are concerned 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 the heavy tax burden.
5.1.1 Increased Tax Burden
Cryptocurrency holders will face a double tax burden. On the one hand, they will need to pay taxes on the realized gains when selling cryptocurrencies; on the other hand, they will also need to pay wealth tax annually based on the net market value of their cryptocurrencies. This will significantly increase the actual cost for investors to hold and trade cryptocurrencies.
5.1.2 Interference with 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 earlier to avoid future tax pressure, while short-term investors may become more cautious in considering their investment strategies to balance returns and tax costs. Although supporters of the unrealized capital gains tax believe that accounting profits already provide economic advantages for taxpayers, and therefore can be "fairly" taxed, in reality, this is not the case for highly volatile assets like cryptocurrencies, as their prices can turn negative within days or even hours. In such cases, the unrealized capital gains tax may force investors to liquidate their assets at unfavorable times, effectively resulting in losses.
5.2 Impact on the Market
The increased tax burden may reduce the market liquidity of cryptocurrencies and other crypto-assets. Taxing unrealized gains may create liquidity problems for investors who may not have yet sold their assets but face tax obligations, a concern that is particularly acute in the highly volatile cryptocurrency market. Investors may face certain cash flow pressures before the tax payment deadline, and if they do not have enough cash to pay the taxes, they will be forced to sell their cryptocurrencies, which will not only put financial strain on the investors, but also potentially lead to fluctuations in cryptocurrency market prices. Additionally, some investors may reduce their trading frequency or choose to exit the market altogether due to the excessive tax burden, leading to an overall decline in market liquidity.
5.3 Global Impact
From a global perspective, as an important member state of the European Union, France's policy changes often have a demonstrative effect on the entire European and even global cryptocurrency market. France's adjustments to its cryptocurrency tax policy may prompt other countries to re-examine their own tax frameworks. For example, the European Union is currently drafting a unified Crypto-Asset Markets (MiCA) regulation, and the MiCA framework represents a consensus among EU member states on tax policies. France's amendment may encourage other EU member states, or even the EU as a whole, to consider similar tax policies. France's approach may also influence other major economies such as the US and Japan, potentially changing 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 facing governments around the world. Although this amendment is still in the preliminary stage and has not yet formally become a legal provision, the underlying tax logic and policy orientation are sufficient to attract the deep attention of cryptocurrency holders and industry practitioners. Globally, regardless of whether a country has a separate capital gains tax, capital gains are generally viewed as an important taxable item under the income tax system. Based on the tax law practices of various countries, some countries and regions (such as Singapore and Hong Kong, China) have set the capital gains tax rate at 0% to attract financial capital, while in countries where the tax rate is not zero, taxation is usually only carried out when the capital gains are "realized", i.e., when the accounting gains are converted into actual gains. For the treatment of capital gains from cryptocurrencies, most countries also follow this practice, and even academic and policy researchers on cryptocurrencies rarely propose taxing the accounting gains of cryptocurrencies. Therefore, this tax amendment by France appears particularly "outstanding" and unique.
Although this amendment appears to be unique, we can still interpret it from two dimensions: the accompanying measures and policy objectives. On the one hand, the taxation of unrealized capital gains on cryptocurrencies is not isolated, but is complementary to the mechanism of offsetting profits and losses of cryptocurrencies, such as this amendment requiring the taxation of "net income" on unrealized capital gains. On the other hand, this tax law amendment is in line with the policy trend of France's strengthened regulation of cryptocurrencies in recent years. This means that the decentralized nature of cryptocurrencies has posed unprecedented challenges for tax collection and management, and the taxation of unrealized income can to some extent simplify the tax collection and management of cryptocurrencies, becoming an important means for the government to strengthen intervention and regulation of cryptocurrencies. Although this amendment may bring certain tax burden to cryptocurrency holders, it is of great significance for improving the tax system and promoting the healthy development of the market, highlighting the phenomenon of governments around the world reconsidering the taxation methods of cryptocurrencies. In the future, with the continuous strengthening of cryptocurrency tax regulation globally, we look forward to seeing a more standardized and transparent cryptocurrency market.
