French quarterly crypto legal & tax briefs

You'll find below the first issue of our French Quarterly Crypto Legal & Tax Briefs newsletter presenting an overview of the latest news regarding crypto regulatory and tax.

For global Crypto news, you can sign up to Crypto View here.

This newsletter will be published quarterly and aims to provide you with a summary of the most recent developments in the field of crypto regulatory and tax that may have an impact on your daily activities.

Our team of lawyers is at your disposal to discuss the topics covered in this newsletter.

1. Regulatory

Data act: which impact for Smart Contracts?

The proposed regulation on harmonised rules for fair access to and use of data (Data Act), currently under discussion in the European Parliament, is causing a stir in the crypto sector.

The purpose of this regulation is to give economic actors a wider opportunity to re-use data by regulating access to and use of the data, while aiming at ensuring fairness in the distribution of the value produced by the data.

Whilst not dealing expressively with crypto assets at a first glance, it appears that one of the articles in the European Commission's proposal is dedicated to "Smart Contracts".

Smart Contracts generally refer to secure computer programs deployed on a blockchain for the purpose of e.g. setting the conditions of a contract and allowing for the automation of its execution when these conditions are met.

Pursuant to the current version of the Article 30 of the proposed Data Act, it is proposed that a party offering Smart Contracts as part of a data provision agreement must comply with a set of essential requirements. These include robustness and access control mechanisms, as well as safe termination and interruption functions.

This provision raises questions. Firstly, it is not defined what is meant by an "agreement to make data available" and consequently whether this provision is intended to apply to all Smart Contracts or only to very specific ones.

The requirement for access control and a termination mechanism to be included in these contracts is also questionable as the essence of Smart Contracts lies in their immutability.

It is also not specified who will be responsible for executing the interruption mechanism.

In its current wording, the Article 30 of the draft Data Act would thus introduce a degree of uncertainty regarding the future of Smart Contracts. Let's hope that the text, as a draft under discussion and most likely subject to extensive amendments at this stage, will be helpfully detailed in this area.

Heading towards a strict regulation to French influencers promoting crypto assets

Introduced on 31 January 2023 at the French National Assembly, the proposal n°790 to fight against scams and abuses by influencers on social networks was unanimously adopted in first reading by the French Senate on 9 May 2023 and is currently under review by the French Parliament Joint Committee.

The purpose of this text would be to establish a new legal framework regulating influencers' promotional activities on social networks, with the objective to improve consumer protection.

In the crypto sector, the proposal intended to prohibit "influencers" from directly or indirectly promote crypto asset or crypto asset services, except where the platform so promoted is registered or licensed in France as a digital asset service provider or "DASP" (and subject for the influencer to comply with transparency rules in its promotional content). This prohibition would be punishable by up to two years' imprisonment and a fine of 300,000 euros.

Nevertheless, enforcement towards the unlawful promotion of financial/ digital assets or services, including by influencers on social media, is already a trend in France. The AMF has been particularly focused on this concern, due to the increase of the phenomenon in the recent years. Lastly, two complaints were filed in January by a group of 88 French investors who were victims of fraudulent investments promoted by a couple of French influencers, notably in NFTs and crypto assets.

To note, this text has a wider scope than the crypto asset sector and should impact others (plastic surgery or related medical devices, gambling...).

DORA Act: focus on outsourcing by crypto asset service providers

Entered into force on 16 February 2023, DORA Regulation and Directive are aimed at providing a unified and dedicated regulatory framework for IT risk management.

This new regulation intends to make the EU's financial sector more resilient, to ensure its technological security and proper functioning. Its scope is broad as it includes all financial actors, including authorised service providers under the future MiCA regulation and issuers of crypto-assets.

The inclusion of these actors in the scope of DORA shows the EU's willingness to treat crypto actors like all other traditional financial actors.

This regulation is organised around 3 main areas:

• risk and incident management related to information and communication technologies;

• the implementation of digital operational resilience tests to monitor the entity's preparedness for IT incidents at least once a year and to identify weaknesses, failures and gaps in this area;

• the establishment of information and intelligence sharing mechanisms between the different entities of the sector on cyber threats.

The challenge for all these entities is to put in place these sophisticated IT risk management processes within the allotted time, as the application of this new regulation and the deadline for transposing the associated directive is set at 17 January 2025.

2. Tax

Transactions to cryptocurrencies

I. Individual investors (tax residents in your jurisdiction)

1. What is the tax treatment of gains/losses on the sale of cryptocurrencies? Is there a difference of treatment if the individual acts as an investor or as a trader?

Subject to the tax-deferral regime (see 2 below), when the individual acts as an investor (assuming that the total annual sale of cryptocurrencies would exceed € 305), any gains will be liable to a 30 % flat tax (including 17.2 % of social contributions); any losses may be imputed only against the same year gains without any carry forward; from 2023, the individual may elect to be liable to the progressive income tax rates for all of his/her cryptocurrency's gains.

When the individual acts as a trader (as defined by the relevant rules), any gains will be liable to the progressive income tax rates (from 0 % to 45 %), plus social contributions of 17.2 % , plus, potentially, an additional contribution for the high income individuals.

2. Is there any tax-deferral regime available in case of exchange of cryptocurrencies against other cryptocurrencies or against other crypto assets?

The tax-deferral is available in case of exchange of the cryptocurrencies against other digital assets (as defined by the relevant rules), but only for the individuals acting as investors (assuming the exchange does not include any non-digital assets elements).

3. Is the payment for goods/services in cryptocurrencies a taxable event?

Yes.

4. What is the tax treatment of the cryptocurrencies received from mining?

There are uncertainties as to the applicable tax treatment.

No taxation would take place at the time the individual receives the cryptocurrencies.

Upon any subsequent disposal of the cryptocurrencies : i) their market value on the date of receipt would be liable to the progressive income tax rates plus social contributions (i.e. income generated from mining), and ii) any gain, i.e. the excess of their market value, on the date of the disposal over the amount in (i), would be treated as per 1 above.

5. What is the tax treatment of cryptocurrencies received by airdrop?

There are uncertainties as to the applicable tax treatment. The below assumes the airdrop is not a consideration for any activity or service provided by the individual.

No taxation would take place at the time the individual receives the cryptocurrencies (which would have a zero tax basis).

Any gains derived from any subsequent disposal of the cryptocurrencies would be treated as per 1 above.

6. What is the tax treatment of cryptocurrencies received from staking?

There are uncertainties as to the applicable tax treatment and various alternatives may be envisaged.

Under one alternative, the cryptocurrencies received from staking would be treated as interest income, in which case i) they would be eligible to the 30 % flat rate upon receipt, and ii) any gain on any subsequent sale (i.e. excess of market value upon disposal over the amount in (i)) would be treated as per 1 above.

Alternatively, no taxation would take place at the time the individual receives the cryptocurrencies (which would have a zero tax basis); any gains derived from any subsequent disposal of the cryptocurrencies would be treated as per 1 above.

Alternatively, no taxation would take place at the time the individual receives the cryptocurrencies. Upon any subsequent disposal of the cryptocurrencies : i) their market value on the date of receipt would be liable to the progressive income tax rates plus social contributions (i.e. income generated from staking), and ii) any excess of their market value, on the date of the disposal, over the amount in (i) would be treated as per 1 above.

7. What is the tax treatment of the lending of the cryptocurrencies and of the remuneration thereof?

There are uncertainties as to the applicable tax treatment and various alternatives may be envisaged.

Under one alternative, the cryptocurrencies received from lending would be treated as interest income, in which case i) they would be eligible to the 30 % flat rate upon receipt, and ii) any gain on any subsequent sale (i.e. excess of market value upon disposal over the amount in (i)) would be treated as per 1 above.

Alternatively, no taxation would take place at the time the individual receives the cryptocurrencies (which would have a zero tax basis); any gains derived from any subsequent disposal of the cryptocurrencies would be treated as per 1 above.

Alternatively, no taxation would take place at the time the individual receives the cryptocurrencies. Upon any subsequent disposal of the cryptocurrencies : i) their market value on the date of receipt would be liable to the progressive income tax rates plus social contributions (i.e. income generated from lending), and ii) any excess of their market value, on the date of the disposal, over the amount in (i) would be treated as per 1 above.

8. What is the tax treatment of the hard fork?

There are uncertainties as to the applicable tax treatment.

The hard fork should benefit from the tax-deferral only in the case of the individuals acting as investors. The individuals acting as traders should be treated as per 1 above in respect of any gains.

9. Is there any specific treatment when the individuals, in their capacity as employees, receive their remuneration in the form of cryptocurrencies?

There is uncertainty as to the legal validity of any employment remuneration paid in the form of cryptocurrencies.

No specific tax treatment should apply : the individuals should be liable, in respect of the value of the cryptocurrencies on the date of their receipt, to the progressive income tax rates, plus social contributions plus, potentially, an additional contribution for the high income individuals.

10. What is the tax treatment of the gift (including as a reward in a game) of cryptocurrencies?

In case of a reward in a game, no taxation would take place at the time the individual receives the cryptocurrencies (which would have a nil tax basis); any gains derived from any subsequent disposal should treated as per 1 above.

In the case of a gift, it should be liable to the gift duties (subject to the availability of any applicable exemption) in respect of the value of the cryptocurrencies on the date of their receipt.

11. Is there any transfer tax (including any VAT) applicable to the acquisition for consideration of the cryptocurrencies?

No. For VAT aspects see 23 below.

12. Is there any obligation to declare to the tax authorities the holding of the cryptocurrencies and is there any sanction in case of non - declaration?

The individuals should declare, annually upon filing their tax return, any cryptocurrencies account they may have outside of France; in the absence of such declarations, the applicable sanctions may go up to € 10 000 per non declaration.

13. In broad terms what are the tax reporting obligations specific to the transactions on cryptocurrencies?

The individuals should declare any gains on the disposal of the cryptocurrencies on a specific form appended to their annual tax return. In practice, the actual computation of the gains/losses is pretty burdensome.

II. Corporate investors (tax residents of your jurisdiction)

14. Is the holding of the cryptocurrencies subject to any yearly mark-to-market valuation?

No, at it is not treated as currency for corporate tax purposes.

15. What is the tax treatment of gains/losses on the sale of cryptocurrencies?

Liable to the corporate tax upon disposal.

16. Is there any tax-deferral regime available in case of exchange of cryptocurrencies against other cryptocurrencies or against other crypto assets?

No.

17. Is the payment for goods/services in cryptocurrencies a taxable event?

Yes.

18. What is the tax treatment of the cryptocurrencies received from mining?

Liable to the corporate tax for their market value upon receipt.

19. What is the tax treatment of the hard fork?

It should be treated as a taxable disposal.

20. What is the tax treatment of cryptocurrencies received by airdrop?

Liable to the corporate tax for their market value upon receipt.

21. What is the tax treatment of cryptocurrencies received from staking?

Liable to the corporate tax for their market value upon receipt.

22. What is the tax treatment of the lending of the cryptocurrencies and of the remuneration thereof?

The lending should be viewed as a taxable disposal. The remuneration should be liable to the corporate tax for its market value upon receipt.

23. What is the VAT treatment of the above transactions on cryptocurrencies (including the exchanges)?

They should be treated either as out of scope or as exempt for VAT purposes.

24. Is there any specific treatment when the remuneration paid to the employees is in the form of cryptocurrencies?

There is uncertainty as to the legal validity of any employment remuneration paid in the form of cryptocurrencies.

No specific tax treatment should apply : the employer should proceed with its withholding tax obligation on the basis of the market value of the cryptocurrencies upon payment.

25. Is there any transfer tax applicable to the acquisition for consideration of the cryptocurrencies?

No.

26. Is there any obligation to declare to the tax authorities the holding of cryptocurrencies and is there any sanction in case of non - declaration?

None.

27. In broad terms what are the tax reporting obligations specific to the transactions on cryptocurrencies?

None, other than their inclusion in the annual tax filing.