Cryptoassets, a still uncertain legal and tax environment

At the time of the debut of WEB3.0, the announced replacement of WEB2.0, the use of crypto assets should experience a new unparalleled boom. As a reminder, WEB3.0 is based on the idea of ​​giving power back to Internet users by creating a “decentralized” web, where they can “transport” their data from one service to another. WEB3.0 aims to eliminate the middlemen that are the big technology companies. The latter is built on blockchain technology, which is the basis of cryptocurrencies, smart contract or Non-fungible Token (“NFT”). This WEB3.0 will undoubtedly generate new spaces for economic exchanges without borders. where the use of crypto assets will be the rule. If crypto-assets will be the WEB3.0 standard, the fact remains that today their definition does not have any standardization at the international level, making it difficult to assess and grasp them from a legal and tax point of view. This shortcoming is particularly reflected in the legal definition of crypto-assets and more specifically of cryptocurrencies.

So far, only El Salvador has recognized Bitcoin as its national currency. Some states recognize cryptocurrencies as legal tender, such as Japan and Honduras or the United Kingdom, which very recently announced its desire to recognize stablecoins as legal tender. Other states equate cryptocurrencies with currencies, such as Belgium, Italy or Poland. France, on the other hand, qualifies them as digital assets. These different legal qualifications obviously lead to different treatment of cryptocurrency exchanges from one state to another.

‘Until now, only El Salvador has recognized Bitcoin as its national currency’

For example, Switzerland, Belgium, Germany and the Netherlands, under certain conditions specific to each of these states, believe that the exchange of cryptocurrencies, on an incidental basis and between individuals, is not a taxable event. France, for its part, has introduced a tax deferral applicable to cashless cryptocurrency exchanges, deferring the tax on the conversion of cryptocurrencies into legal tender currencies or the purchase of assets or services against delivery of cryptocurrencies. France is nevertheless pulling out of the game by extending the deferral regime to stablecoin exchanges, giving stablecoin holders great freedom to control the triggering event of their taxation without being subject to the vagaries of highly volatile cryptocurrency prices.

However, the great limit of these different national laws stems from their scope, limited to the borders of the respective country. International standardization is therefore more than necessary. For example, various international organizations are working on the development of international standards. A first OECD report was published in October 2020 outlining the first schools of thought (inclusion of crypto-assets in the existing tax framework of each Member State, dichotomy between the treatment applicable to professionals and non-professionals, and a requirement for transparency of the different players).

Recently, the draft European regulation known as “MiCA” of March 14, 20224 came out to lay down the axes for the establishment of a new harmonized legal framework. In particular, the proposed regulation provides for (i) a taxonomy of the definitions of the different types of crypto-assets, (ii) a regime for public offerings of different types of crypto-assets (excluding financial or monetary assets already covered by the law of the EU), (iii) a regime specific to public offerings of “stablecoins” and (iv) a regime specific to crypto asset service providers. However, at this stage, legislators’ efforts are essentially limited to dealing with cryptocurrencies and ignoring new cryptoassets.

More specifically, the treatment of NFTs remains in a gray area, despite the great enthusiasm for it, especially in the art world. Let’s take, for example, the work of the artist Beeple entitled “Everydays: the first 5000 days”, sold for 69.3 M$ or Martin Scorsese’s next film financed exclusively by NFT. Like its neighbors, the French government has not been noticed for appropriating these subjects, although parliamentarians have questioned it. Indeed, two questions have been put to the Government regarding the tax treatment applicable to this NFT5 and during work on the Financial Act for 2022 we will take note of an amendment proposed by the Deputy Mr Pierre Person proposing to extend the profits from treat the transfer of NFT in accordance with the tax regime applicable to the underlying asset of which the NFT forms the digital certificate. Despite this pragmatic change, it was withdrawn at the last minute by the petitioner. If developments in tax matters on these subjects are not too rosy, we will see real progress in the area of ​​voluntary sales. With the introduction of the law aimed at modernizing the regulation of the art market, the legislator has extended the scope of voluntary sales to include sales of intangible movable property.

“The Council of State had indeed come to the conclusion that bitcoins could be qualified as intangible movable property”

This option is aimed at the sale of goodwill, but also NFTs. In addition, this amendment to Article L 320-1 of the Commercial Code also took into account the “drilling development of the NFT market” as expressed during parliamentary debates and the size of NFT public auctions. not without consequences for the tax treatment of profits from NFTs, because then it could be assumed that NFTs would not be digital assets as defined in Article L 54-10-1 of the CMF, Article referred to by Article 150 VHbis of the CGI to define its scope. In the absence of ticking the digital asset box of Article L. 54-10-1 of the CMF, there are good reasons to believe that the reasoning of the Council of State in its decision of 26 April 20188 on the qualification of bitcoins before the intervention of the legislator in 2019 will then apply to the NFT. The Council of State had indeed come to the conclusion that bitcoins can be regarded as intangible movable property within the meaning of civil law, the regime for the transfer of movable property as defined in Article 150 UA of the General Tax Code was applicable.

The income was thus subject to an overall rate of 36.2% after the application of a deduction of 5% for a period of ownership after the second year, whereby income of less than €5,000 was exempt. In addition, if the suitability of NFTs for copyright protection were confirmed, the art transfer regime, which provides for a flat tax of 6.5% on the sale price, could subsequently be applied. In any case, if confirmed, the acquisition or sale of NFT against cryptocurrencies should therefore not benefit from the tax deferral as defined in Article 150 VH bis of the CGI. In conclusion, clarification at the national and international level on crypto assets would be welcome so that all players can understand and appreciate all the implications of these assets.

By Christophe Flaicher, Assistant Attorney and Gwendal Chatain, Attorney at Law. Taylor Wessing

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