Background   More than one in ten French people own digital assets in 2023. While the number of crypto-asset holders has remained flat in neighboring countries, this figure continues to grow in France. This trend goes hand in hand with the growth of a sector that is now well established in France, with a network of companies that includes numerousstartupsand major players with an international presence. France has been able to highlight a number of strengths to attract businesses and foster the development of Web 3.0 projects. In particular, it has established atailoredlegal framework applicable to services related to this new class of assets. In addition, starting in 2019, an innovative tax regime was established to set the rules for taxing capital gains on digital assets realized by individuals. This regime, provided for in Article 150 VH bis of the General Tax Code, was designed to simplify taxpayers’ reporting obligations and the tax administration’s monitoring of transactions. Its main feature is the tax-neutral treatment of exchanges between digital assets, which are treated as intermediate transactions. The taxpayer is therefore only liable for tax when selling digital assets for fiat currency or when using crypto-assets to acquire goods or services. Nevertheless, this tax framework has remained largely unchanged since that initial phase, even though new uses and practices have diversified considerably in recent years. According to the 2024 study conducted by KPMG and the Ipsos Institute for ADAN, a higher proportion of French people (34%) believe that the tax system is ill-suited to crypto-assets compared to their neighbors. By comparison, only 21% of British respondents, 23% of Germans and Dutch respondents, and 30% of Italian respondents believe that their national tax system is not appropriate for this type of investment. Added to this challenge are the challenges faced by companies that are adopting increasingly innovative practices involving digital assets. These innovations, which enable companies to raise capital in the market or attract talent, are sometimes difficult to address under existing rules, and the tax framework is a source of considerable uncertainty. This report aims to highlight some of these challenges in order to propose concrete solutions for adapting the tax and accounting framework applicable to crypto-assets in France. It is based on an analysis of current practices and the challenges identified by the sector. To this end, it seeks to offer concrete recommendations to enhance legal certainty for taxpayers and improve the clarity of tax regulations.

Taxation of Digital Asset Allocations to Project Contributors 

Blockchainand crypto-assets offer highly innovative mechanisms for businesses. The creation of fully customizable tokens can be used to finance projects, power services, or directly engage stakeholders in a project and attract talent.

The value of the tokens issued depends on various factors related to the token issuance process and is often linked to the company’s success.

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

At the same time, it is common in the Web 3.0 sector for individuals contributing to the development of a company’s project (such as software developers) to be rewarded with tokens. Among these contributors, however, those with employee status are generally excluded from this form of incentive due to uncertainties surrounding the tax and social security treatment of such awards. 

In fact, for employees, the allocation of tokens is considered a benefit in kind for which social security contributions are due immediately. However, if the company grants these tokens while the project is still in the preparatory stage or if the tokens are not listed on exchanges, it is very difficult to value them, and employees generally wish to hold onto them to support the company’s project over the long term.

In addition, the tokens awarded may be non-transferable during a vesting period that can sometimes last up to three years. This practice is consistent with the goal of ensuring long-term commitment to the company’s project.

Between the grant date and the vesting date, the value of the stock options can fluctuate significantly. The company therefore faces considerable uncertainty regarding the corresponding expenses if the value of the in-kind benefit subject to social security contributions is determined on the date the stock options become exercisable (or, worse still, upon the employee’s sale of those stock options).

These considerations mean that salaried employees are often excluded from stock option plans, even though this mechanism is intended to reward all individuals who have contributed to a company’s success.

To enable employees to receive tokens, Adan recommends clarifying the tax and social security implications of a token allocation plan implemented by a company for the benefit of employees, service providers, and founders.   To provide greater legal certainty, consideration could be given to establishing a model agreement, the implications of which would have been reviewed by URSSAF and the tax authorities. The template could provide for the allocation of stock options to employees based on objective criteria (for example, an objective allocation based on seniority, compensation,identical vestingterms, etc.) and define a valuation method for the stock options that is definitively set on the date of the grant plan.

The goal would be to establish the conditions a company must meet to have a token allocation plan and to determine the tax and social security implications. To that end, the following framework is proposed:

 

The granting of tokens, whose value is determined as of the date the company grants them, is considered a benefit in kind subject to personal income tax and social security contributions.

• If the shares are granted to the employee prior to the initial public offering, they should be valued at cost by the company and the lock-up period should be taken into account. 
• If the tokens are subject to avesting period—that is, if they are restricted for a specified period—the benefit in kind is taxable at the end of that restriction period, based on the value of the tokens as of the grant date. 
• Capital gains realized upon the employee’s subsequent sale of the tokens are taxed in accordance with Article 150 VH bis of the General Tax Code (tax regime for digital assets), provided that the acquisition price is increased by the value of the benefit in kind. 

Such a contractual arrangement, with its terms backed by government agencies (URSSAF, tax authorities), would provide sufficient clarity to enable issuing companies to grant stock options to their employees.

Taxation of token sales by an issuer

Initial Coin Offerings(ICOs) remain an innovative financing mechanism widely used in the Web 3.0 sector and one that would benefit from becoming more widespread in other industries to stimulate business growth. An ICO can be defined as“a fundraising operation in which a company in need of financing issues tokens, which investors subscribe to primarily using cryptocurrencies. These tokens may grant them access, in the future, to that company’s products or services.”

This type of transaction offers numerous advantages for both companies and investors and is now governed by a well-established legal and accounting framework. However, as this practice has grown, uncertainties have arisen, particularly regarding their tax treatment. 

Recognition of proceeds from the sale of tokens 

Regulation No. 2018-07 of the Accounting Standards Authority (“ANC”), dated December 10, 2018, established a framework for the accounting treatment of token issuance transactions. Specifically, the token issuer must record the proceeds received from the sale of such tokens in accordance with the rights and obligations attached thereto (Article 619-4 of the General Chart of Accounts).

⇒ Three scenarios are provided for in this regard: 

• If the tokens have the characteristics of a repayable debt, they are recorded as loans and similar liabilities;
• If the tokens represent services yet to be performed or goods yet to be delivered, pursuant to an explicit or implicit commitment by the issuer, they are recognized as deferred revenue;
• Otherwise, if there are no explicit or implicit obligations, the amounts collected are considered to be definitively retained by the issuer and are recognized as revenue.

Inmany cases, the issuer implicitly commits to the buyers to develop a platform, a protocol, or a service offering. To this end, it publishes a white paper detailing the issuance process and its objectives. 

In its regulatory guidance, the ANC confirms that such a commitment requires the issuer to record the proceeds from the sale of tokens as “deferred revenue.” Thistreatment is consistent with the purpose of a token offering used to finance a long-term project. However, doubts remain regarding the method to be used for recognizing this revenue. 

Developing a Web 3.0 project can be a lengthy and complex process, which explains why funding through token issuance is a preferred method. A technology project developed over several years leads to the creation of complex services. In this respect, it is similar to a long-term contract, as defined by Article 622-1 of the General Accounting Plan. The preferred accounting method for long-term contracts is “percentage-of-completion” accounting, which recognizes revenue as expenses are incurred relative to the initial development budget. This method is also the most consistent with the economic reality of financing a large-scale technology project, as the funds allocated are intended to be used exclusively for investments that do not generate any immediate returns for the company. When this method is adopted for accounting purposes, the principle of fiscal-accounting alignment should ensure that it produces its full effects for tax purposes.

However, accounting using this method appears to be accepted for tax purposes only as a matter of administrative leniency, for construction and public works companies, as well as shipbuilding companies (BOI-BIC-PDSTK-10-10-10 No. 180).

In order to better reflect the economic reality of the project’s financing and development, the tax effects of the preferred “percentage-of-completion” accounting method should be recognized when the company adopts this method for accounting purposes.   Furthermore, this method would ensure that the tax burden borne by the company reflects the actual increase in its wealth when the funds collected are intended to finance long-term investments.

Personal Income Tax 

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

Mining is the process of securing the network and validating transactions in exchange for rewards in the form of digital assets distributed directly by the protocol. This activity is essential to the functioning of the blockchain and relies on the participation of users known as validators (or miners). 

The tax treatment of mining rewards has undergone various changes since it first appeared in administrative doctrine in 2014 and has raised a number of questions regarding when and under what tax regime the income is taxed.

The decision of the Council of State dated April 26, 2018 (Joint 8th and 3rd Chambers, 4178092) subsequently clarified that income derived from the sale of mining rewards constitutes Non-Commercial Income (BNC). This decision therefore implicitly provides clarification regarding the point at which such income must be considered available and thus taxable, as the sale constitutes the triggering event for BNC taxation. 

However, this decision was issued prior to the tax regime governing the disposal of digital assets under Article 150 VH bis of the General Tax Code, which is silent on the issue of mining income. Today, the interplay between the two regimes and evolving practices in the crypto-asset markets have once again raised questions regarding the taxable event and the applicable tax regime for this activity. 

This uncertainty is detrimental to both taxpayers and the tax authorities and leads to disputes. 

It therefore appears necessary to clarify the regulatory framework governing mining-related activities in order to avoid disputes and preserve France’s competitiveness in the Web 3.0 sector. Such an approach, however, requires a detailed analysis of the behavior of digital asset holders and a clearer definition of the activities covered by the concept of mining, or “participation in the operation of the system,” according to the terminology used in 2018 by the Council of State. 

A distinction must be made between operators and passive participants

Several methods are used to validate and secure transactions on ablockchain. On the Bitcoinblockchain, for example, the network is secured through mining, using a "Proof of Work" consensus mechanism. In this case, only the person who validates the block of transactions receives the reward. 

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

In practice,stakinginvolves two categories of participants who receive rewards: 

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

In the Q&A published by the European Securities and Markets Authority (ESMA) regarding the application of the Markets in Crypto-Assets Regulation (MiCA), a distinction is made between different types ofstaking. In particular, it is emphasized that in certain cases, also known asstaking-as-a-service, thestakingservice is provided for a fee by intermediaries who undertake to stake the crypto-assets on behalf of their clients. In this situation, the authority states that clients commit their assets to a liquiditypoolin exchange for a return.

While the term“staking”is commonly used to refer to direct or indirect participation in securing and operating ablockchainthrough a proof-of-stake security mechanism, the distinction between active participants (validators) and passive participants is nonetheless fundamental from a legal and tax perspective. 

The indirect participant’s compensation reflects the provision of digital assets rather than the operation of a business. 

The BNC regime therefore does not appear to be suitable for this case, which must be treated differently for tax purposes to ensure a clear and simple framework. In particular, we have identified the following difficulties.

The Adan suggests revising the current tax doctrine, which is perceived as ambiguous by both taxpayers and the decentralized finance sector. It advocates for a clear distinction between active validation activities and passive participation in the process of validating digital asset transactions.   The BNC tax regime is designed for income from business activities. However, the passive income of indirect participants corresponds to compensation for making digital assets available, not to an active business activity. Consequently, while taxation under the BNC category is appropriate for direct profit-making activities, such as those carried out by validators, it is not appropriate for taxpayers who do not directly participate in the validation of transactions. The latter, by simply making assets available for validation, should be subject to the capital gains tax regime, which would be consistent with the objective of simplification and tax clarity sought by the legislature and reflected in Article 150 VH bis.

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

⇒ The challenge of simplifying tax law and making it easier to understand 

Taxing income in the BNC category at the time of receipt requires taxpayers to track each transaction and value it in real time. 

While such accounting practices are understandable for a business owner, they are very difficult for an individual to implement.

For indirect participants, these rewards constitute passive income generated without any action on their part. They may receive several hundred of them per day, though the amounts are sometimes very small.  

The frequency of trading transactions has led lawmakers to exempt individuals from taxation on such transactions. As part of this same effort to simplify the system, deferring the taxation of gains until the sale of digital assets—as suggested by the Council of State—would be a pragmatic and effective solution that is consistent with the spirit of the tax regime for crypto-assets. 

It is important to note that for most taxpayers, these transactions can amount to thousands of transactions per year, often resulting in a very low total annual income. 

⇒ Price volatility that could penalize users generating passive income through long-term investments

For indirect participants, depositing funds is an investment rather than a short-term investment.

The extremely high volatility of prices can result in taxpayers being penalized for the period between the collection and the sale of the prizes. While they are taxed immediately upon receipt, they do not have the euro-denominated funds to cover the tax, unless they proceed with an immediate and regular sale of the crypto-assets.

Given the evolution of mining methods, the ever-increasing frequency of transactions in crypto-asset markets, and price volatility, taxing the rewards associated with each transaction at the time they are received would pose numerous challenges for both taxpayers and the tax authorities.    Consequently, ADAN suggests that taxation of rewards be deferred until the time of disposal for individuals who participate passively in mining. This approach would align taxation with the receipt of income in euros, in line with the solution adopted by the legislature for Article 150 VH bis of the General Tax Code. This would also constitute a simplification in line with the spirit of thead hocregime set forth inthatarticle, which provides for deferring the taxation of income from crypto-asset exchanges until the date of their sale.  Finally, this approach would simplify tax filing for taxpayers while maintaining the integrity of the tax system.

⇒ A solution that enables the exploration of new use cases related to liquid staking

Liquidstakingtokens (“LSTs”) represent a recent development in the field of digital assets, designed to reduce users’ exposure to the uncertainties of mining revenue. 

These tokens derive their value partly from the price movements of a reference digital asset and partly from thestakingrewards associated with that asset. As a result, the value of the LST increases in line with the rewards, without the holder receiving them directly.

In the context of an exchange or sale of an LST, taxing gains upon receipt would require precisely determining the portion attributable to the gains and the portion attributable to price appreciation, which in practice proves to be very complex for both taxpayers and the tax authorities responsible for reviewing tax returns.

Given the evolution of mining methods, the ever-increasing frequency of transactions in crypto-asset markets, and price volatility, taxing the rewards associated with each transaction at the time they are received would pose numerous challenges for both taxpayers and the tax authorities.    Consequently, the Adan suggests that taxes on rewards should be levied at the time of transfer for individuals who participate passively in mining.  This approach would align taxation with the receipt of income in euros, in line with the solution adopted by the legislature for Article 150 VH bis of the General Tax Code.  This would also constitute a simplification measure consistent with the spirit of the ad hoc regime set forth in that article, which provides for deferring the taxation of income from crypto-asset transactions until the date of their disposal.  Finally, this approach would simplify tax filing for taxpayers while maintaining the integrity of the tax system. For validators who directly operate a mining operation, the rewards would be subject to business income tax upon receipt.

A necessary adjustment to the transfer rules 

For validators actively engaged in mining, the taxation of rewards would thus take place in two stages. 

Here's how it works: 

• When rewards are received, the gain corresponding to the value of the crypto-assets on the date of receipt is taxable as unemployment income;
• Upon the sale of these crypto-assets, a capital gain is taxable in accordance with the provisions of Article 150 VH bis of the French General Tax Code (taxed at an overall rate of 30%).

If prices fall between these two events, the taxation ofstakingrewards upon receipt exposes taxpayers to a net loss, or even to paying more in taxes than the actual reward received. However, while this risk may be incurred in other types of investments, the tax regime for crypto-assets is unique in that it does not allow taxpayers to carry forward their capital losses. 

⇒ Example: In April 2023, Adrien makes astakingdeposit and receives 1.5 Ether as a reward, with a market value of €2,250, which he decides to keep in his digital asset portfolio. By 2024, the value of Ether has dropped to €700. Adrien therefore now has only €1,050 tied up instaking; however, he remains liable for BNC tax on the €2,250 in income deemed to have been earned in 2023. Furthermore, Adrien will not be able to offset this capital loss against any other potential capital gains. 

The Adan has, in fact, already brought this issue to the attention of lawmakers during previous budget debates. To mitigate this risk, it would appear necessary to review the tax treatment of potential losses incurred through taxation upon receipt ofstakingrewards, on the one hand, and the non-carryover of capital losses incurred upon the sale of crypto-assets, on the other.

To ensure consistency between these two tax regimes, capital losses on the sale of digital assets should be allowed as a deduction(i)against total income, particularly when such losses arise from the sale of rewards, and(ii)against capital gains in subsequent years.

Tax Treatment of E-Money Tokens 

To mitigate price volatility, the crypto market has seen the emergence ofstablecoins, a type of crypto asset designed to maintain a stable value, typically backed by a single fiat currency.

Under French law, stablecoins are digital assets

Article L.54-10-1 of the Monetary and Financial Code (CMF) defines digital assets as“any digital representation of value that is not issued or guaranteed by a central bank or a public authority, that is not necessarily tied to a legal tender and which does not have the legal status of a currency, but which is accepted by individuals or legal entities as a medium of exchange and which can be transferred, stored, or exchanged electronically. "  

In France,stablecoins(crypto-assets whose value remains stable because they are backed by a legal tender or other assets) therefore meet the definition of digital assets. From a tax perspective, this means thatthe exchange of a stablecoin for another digital asset is tax-neutral. This, in fact, is the very foundation of the tax regime for digital assets established in 2019: transactions are not taxed as long as they remain within the virtual economy; they are taxed when the investor repatriates their funds into the real economy. 

Some stablecoins are considered crypto-assets under the European MiCA regulation

Heavily inspired by the French regulatory framework established in 2018, the European regulation on crypto-asset markets (MiCA) will take effect in December 2024. The French Web 3.0 sector is looking forward to this European harmonization.  

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

• electronic money tokens (EMT) when thestablecoin isbacked by a legal tender; 
• asset-backed tokens (ART) when they are backed by other assets. 

For the purposes of this report, we will focus solely on stablecoins, which are defined as follows in the MiCA Regulation:“a type of crypto-asset designed to maintain a stable value by pegging to the value of an official currency.”

MiCA thus recognizes that EMTs are fully-fledged crypto-assets, which must be distinguished from electronic money. The text even specifies that “ despite their similarities, electronic money and crypto-assets linked to an official currency differ in certain important respects. "

Consequently, electronic money tokens should not be considered electronic money or funds, and the entry into force of the MiCA Regulation should—logically—have no impact on the application of the regime provided for in Article 150 VH bis of the General Tax Code, namely that the exchange of one crypto-asset for another crypto-asset is tax-neutral.

E-money tokens should not be broadly regarded as electronic money

Other ongoing discussions at the community level are causing concern within the sector, particularly if they were to have tax implications. 

On June 28, 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 broadly equate electronic money tokens (EMTs) with electronic money. 

Such an approach would result in EMTs being treated as“funds.”This treatment is problematic in that it does not reflect the nature of EMTs or 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 dealing with EMTs, even though they are already subject to the MiCA regulation. However, this point will not be addressed in this report.

The Adan urges that the legal uncertainties currently under discussion at the European level not have any repercussions at the national level. The tax regime for digital assets has been recognized for its innovative nature, and, as a matter of national jurisdiction, it should not be subject to change as a result of EU-level debates.

 Amend Schedule 2086 regarding the reporting of capital gains 

Form 2086 must be completed to report capital gains on digital assets. It can only include a limited number of transactions (5 for the paper form, 20 for the online filing). These limitations create complexity for taxpayers, as it is common for individuals to exceed this number of transactions in a given year.

The Adan therefore suggests that the tax authorities modify their form—at least in its digital version—to allow for at least 100 transactions per year. In this context, it is proposed that:    expressly provide for the option to group transactions by day or by order (since multiple orders can generate numerous transactions on a platform); or  introduce an additional annex that would allow for more flexible and detailed recording of transactions. This annex would facilitate the management of reports exceeding the current thresholds by providing the ability to document all necessary transactions without any restrictions on the number.

About Adan 

Adan brings together more than 200 professionals—both new entrants and established companies—who work daily to advance innovation and use cases for the decentralized web across all sectors of the economy. By removing barriers to their growth and competitiveness, Adan works to foster the emergence and influence of French and European leaders in support of our digital sovereignty. Adan promotes a regulatory framework that is tailored, proportionate, and conducive to innovation, as well as a better understanding of new blockchain technologies, crypto-assets, and the opportunities they present. 

Contacts :  

Faustine Fleuret, President and CEO -faustine.fleuret@adan.eu
Mélodie Ambroise, Director of Strategy and Institutional Relations -melodie.ambroise@adan.eu
Alizée Van Den Schrieck, Legal Affairs Officer:alizee.vandenschrieck@adan.eu 

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