Investment in crypto-assets has grown significantly over the past few years, with many companies now holding them on their balance sheets and a large number of innovative companies being established in this sector. Here we look at the tax treatment of these digital assets when owned by businesses. The 2019 Finance Law has created for the first time a tax regime for individuals (and partnerships referred to in Article 8 et seq. of the General Tax Code) specific to occasional disposals of digital assets, partly inspired by the regime applicable to gains on securities. It sets an overall tax rate of 30%, equivalent to the flat tax, i.e. a rate of 12.8%, plus social security deductions of 17.2%. The specificity of this particular regime is that it introduces, in particular, a tax deferral in the case of an exchange of digital assets without an equalisation payment, in order to take into account the large number of transactions associated with the sector.
For legal persons, there is no specific regime for gains or losses from holding digital assets. However, the Parliament raised the issue during the discussions on the 2022 budget, where several amendments were tabled. Proposals aimed at harmonising the tax treatment of companies with that of individuals were rejected, as these amendments could have led to a de facto exemption for companies that choose not to convert their digital assets into euros. All these amendments were rejected by the government and withdrawn. The result is that, unlike individuals, there is currently no specific tax regime for companies subject to corporate tax.
Therefore, in the absence of rules deviating from the accounting principles, subscription to and possession of digital assets are recognised and taxed in accordance with the accounting rules applicable to each category of that asset. In the absence of a tax deferral, any exchange of one digital asset for another digital asset results in the recognition of a taxable capital gain or loss. As a result, the development of digital assets is hampered by a tax system that results in the recognition of a gain or loss on each exchange transaction.
Taxation of digital asset issuance
An Initial Coin Offering (hereinafter “ICO”) is a public offering to raise funds for the financing and development of an issuer’s project. It gives rise to the issuance of digital tokens, which are given to the investor in exchange for a sum of money or crypto money. ICOs are carried out using blockchain technology, so there is no middleman between the subscribers and the token issuer. An ICO offers significant advantages, especially for the issuer of the project. ICOs can be completed quickly and the lack of barriers on the internet means that a wide audience of investors can be reached. Furthermore, it allows project leaders to raise funds without opening up their capital, which in turn allows them to raise funds without dilution.
The bill on the growth and transformation of businesses, known as the “Pact”, has created a framework for these fundraising operations in light of their growing importance (6.8 billion raised in 2017, 21 billion in 2018) and has made France a pioneer in this area. With regard to the issuance and exchange of tokens, the supply of goods and services for consideration by a taxable person acting as such is subject to VAT.
A transaction is subject to VAT if there is a direct link between the service provided or good acquired and the consideration received, i.e. if a transaction provides the customer with an individualised benefit on the one hand, and if the price received in return is related to the benefit obtained on the other. Individual subscribers are taxed either at the flat rate of 30% with deferred taxation if they act as individuals, or in the industrial and commercial profit category if they act as professionals.
Taxation of digital assets
Value added tax (VAT)
A company that has acquired digital assets whose issuance has been subject to VAT is entitled to deduct the VAT in accordance with the general legal rules, provided it is in possession of a document showing the deductible VAT (invoice, etc.).
If they have been treated as multi-purpose vouchers, the right to deduct VAT can of course only be exercised when the VAT is payable by the issuer.
If they fall under the rules for single-use vouchers, VAT should be immediately deductible under the general legal provisions. Without prejudice to the ordinary law rules on territoriality, resale should be taxable.
Corporate income tax
Taxation of holdings of financial instruments (“secf/r/tytokens”)
For accounting purposes, the French general chart of accounts distinguishes between three different types of token:
– tokens with characteristics of financial securities, savings bonds or financial contracts, or “securities tokens;
– Tokens recognised as intangible assets'”‘ ;
– Tokens recognised as current assets: these are tokens that do not have the characteristics of financial securities, financial contracts or cash coupons, with no intention to use the related services or deliver the related goods.
The concept of digital assets was defined in Article L. 54-10-1 of the French Monetary and Financial Code when the PACTE law was adopted in 2019. According to this article, digital assets comparable to the instruments mentioned in Article L. 21J-1 of the Monetary and Financial Code and the savings bonds mentioned in Article L. 223-1 of the same code fulfil the characteristics of financial instruments. In practice, these are mainly shares, debt securities, units or shares in collective investment undertakings, financial futures instruments and savings bonds.
For accounting purposes, the company’s digital assets must be recognised in accordance with the accounting rules applicable to the type of financial instrument to which they are linked. For tax purposes, as mentioned above, there are no special rules, so the accounting and tax treatment is identical. However, if digital assets give rise to the payment of ‘rewards’ that are similar to interest, the latter must be recognised in the income statement for the financial year in which they accrue. For accounting purposes, the company’s digital assets must be recognised in accordance with the accounting rules applicable to the type of financial instrument to which they are linked.
Taxation when holding non-financial digital assets (“utility tokens”)
The accounting and taxation of these digital assets will depend on the intention of the entity acquiring them. If the company intends to use the services or goods associated with the acquired digital assets beyond the subscription period, they must be recognised as “intangible fixed assets” in accordance with Article 619-1l of the General Tax Code.
Otherwise, they will be recognised in current assets as cash instruments. Digital assets recognised as intangible assets – Normal accounting rules will apply, so digital assets must be amortised in accordance with the applicable rules, i.e. over their actual and foreseeable useful life. It should be noted that if the expected use of the related services or goods no longer exists, the digital assets recognised as intangible assets can be transferred to cash instruments.
The transfer must be made at the net book value. However, any reverse transfer of digital assets recorded in a cash account to an intangible asset account is prohibited. In accordance with the traditional rules, an impairment test must be performed in case of impairment, i.e. when the market value of the digital assets turns out to be less than their net book value. When a company wants to remove its digital assets from the balance sheet, it can do so by voluntary redemption, which would involve cancelling the net book value of the token on the transaction date, but it is more common to sell these digital assets to a third party on the secondary market. Again, the accounting and tax rules are identical. The difference between the sale price and the net book value will constitute a capital loss or capital gain that is taxable under ordinary law. Digital assets are recognised as cash instruments – In all other cases, digital assets will be classified in account SZZ “Tokens held” and the unrealised gain or loss will be recognised as an asset or liability.
In case of sale or withdrawal, capital gains or losses are calculated using the FIFO (first-in, first-out) or WAC (weighted average cost of acquisition) method. Here too, the general legal rules apply, both from an accounting and a tax point of view. The current digital asset holding regime poses unsustainable constraints for businesses and accountants, especially as they perform a large number of exchanges between digital assets. The number of transactions involved and the volatility of the tokens make this a complex exercise.
During the discussions on the 2022 Finance Act, an amendment was proposed to defer the time of taxation of profit or loss to the time of the transaction that enriches the business, i.e. the sale in exchange for currency or other goods or services. The purpose of this amendment was to bring the regime applicable to companies in line with that adopted for individuals in the Finance Act 2019.
However, to allow the state to benefit from budget revenues in a post-covid context, a three-year tax deferral period was introduced, at the end of which untaxed profits would be reintegrated into taxable income. However, this amendment was not adopted. As a result, any exchange of a digital asset for another digital asset would currently result in a taxable capital gain or capital loss in the absence of a tax deferral.
The French tax system is still under construction. As the current rules impose certain constraints on companies carrying out a large number of exchanges between digital assets, particularly with regard to the calculation of the taxable capital gain, it is now more than desirable for the legislator to intervene to remedy this situation so that a framework adapted to the specific nature of this new category of assets can be adopted.
Cabinet Nicolas BRAHIN
Advokatfirma i NICE, Lawyers in NICE
Camilla Nissen MICHELIS
Assistante – Traductrice
1, Rue Louis Gassin – 06300 NICE (FRANCE)
Tel : +33 493 830 876 / Fax : +33 493 181 437
Camilla.nissen.michelis@brahin-avocats.com
www.brahin-avocats.com
