Senior teacher, School of Law
Professor (dr.) at Jean Moulin
Lyon III University
Director Master 2 Business and Tax law / DJCE
The development of digital assets is overturning traditional economic circuits (by freeing themselves from the role played by intermediaries), disrupting the way activities are financed, and offering multiple and innovative perspectives for all sectors of activity. Such developments also raise many questions, particularly regarding their legal, accounting and tax treatment, both in France and abroad. France made early attempts to regulate this phenomenon by setting out provisions in the Monetary and Financial Code, when the PACTE Act (Action Plan for Business Growth and Transformation) was adopted, and in the French General Tax Code. But many questions remain debated.
The tax legal framework may evolve further in the future due to the ongoing adoption of the EU MiCA Regulation, even if it does not contain tax provisions. After identifying a number of tax issues, the OECD has also recently launched a public consultation and is likely to make recommendations to address the tax evasion risks posed by digital assets.
During the adoption of the 2022 Finance Act, voices were raised to draw the attention of the public authorities to the difficulties that practitioners face at this time in determining the appropriate tax treatment of certain digital assets. This is particularly the case for NFTs, for which some argue in favor of aligning the regime with that of the underlying asset represented.
The aim here is not to enter a particular debate, as the regulations will undoubtedly evolve, but to formulate synthetic proposals to have a coherent reading grid. The aim is to avoid the accumulation of technical provisions. It also aims to find tax solutions that protect the interests of the State, but that do not lead to distortions of competition or to solutions that would hinder the development of new activities. Fair taxation is first and foremost taxation that treats comparable situations in an equivalent or neutral manner. In fact, it is possible to combine a legal framework based on the principle of “same risk, same regulation” with a tax system that has a functional reading of digital assets.
Of course, with the development of a technology that has not yet reached its full potential, there are risks of fraud, money laundering or tax evasion. This is not to be denied. But the development of digital assets should also be an opportunity to reflect more deeply on the relevance of our concepts (can the contract be the source of a “currency”? Should a virtual asset follow the same regime as its physical equivalent?) and of our rules (can international tax law in its current state apprehend the activities developed in the metaverse?). We must also consider the measures that would make it possible to accompany these developments without hindering them, by improving their transparency, while preserving public order (how to avoid fraudulent practices based on platforms established abroad?).
In this regard, all branches of tax law are affected by the development of digital assets and digital activities. Ownership, transfer for consideration or even free transfer are all classic taxable events that apply to this type of asset. Is the provision of digital assets the same as the provision of a service for VAT purposes, but also for other taxes? What is the threshold at which a private individual is no longer considered to be acting as such, but as a professional? Should transactions in digital assets be taxed immediately when the person who obtains these units does not necessarily have the cash to pay the tax? There are many questions, and the answers are only just beginning to emerge. The tax authorities will probably also have to review the way they collect tax: automatic exchanges of information on digital assets between administrations, reporting obligations on platforms, withholding tax at source: the tools for control and collection will have to be modernised once again.
Until such a development allocating tax collection takes place, it appears that at this stage of the debate, the use of digital assets in our economic system frequently pursues three different purposes which allow them to be classified in a more precise manner than the current state of positive law (I) and it is based on these that the tax system should, in our opinion, be adjusted (II).
I. Classification of digital assets based on their function
These three functions are: payment; investment; and placement.
1.1 The payment function
Digital assets can be used primarily as the equivalent of a payment method. This is not to say that cryptocurrencies are a true legal currency, nor that they perform the traditional functions of one. Most of the time, this is not their creator aim. The point is to take into consideration that some digital assets are designed as a medium of exchange: their use releases the debtor from his obligation, because the creditor agrees to it.
1.2. The investment function
The second function of digital assets is an investment function. Here, it is a question of considering some tokens or any other equivalent asset as a financing instrument for the issuer. It can therefore be an alternative to equity or debt financing, as shown by the development of ICOs. Although it may result in the allocation of a good or service, its primary purpose is to provide resources to the company issuing the tokens concerned.
1.3. The placement function
The third and final function of digital assets is their placement function. In this case, they are used for speculative purposes, where the assets are held for later disposal or for exchange against other digital assets or even against other currencies.
Payment, investment, and placement: the functional approach makes it possible to classify digital assets without the difficulties of legal qualification. It is true that some digital assets may have several different functions. But there is probably an inherent element in any asset: one can collect art or speculate on it; spend all one's income or build up savings. In fact, it is possible to correct this difficulty based on the use made of the concerned digital asset: keeping assets with a payment function is not an operating event, nor is the constitution of savings. However, their transfer is a chargeable event because it is the very transfer that indicates a desire to make a profit.
This functional approach probably does not solve all the obstacles, but as we shall see, it can help to avoid systematic and indiscriminate taxation of companies and individuals who use this new type of asset and transaction. Taxation should be a lever for innovation, not a drag on it.
II. The tax regime for digital assets based on their function
In the light of the three functions thus identified, it is possible to read the current tax regimes. These can take three forms: specific regimes for digital assets; regimes designed by equivalence; and regimes marked by a concern for neutrality.
2.1. Specific regimes
This is the path chosen by the French legislator with the adoption of the provisions of Article 150-0 VH of the General Tax Code. In other words, anyone who transfers digital assets in exchange for legal currency or a good or service or for another digital asset but with the payment of a complementary sum is taxable on added value thus generated. However, this regime exclusively applies to natural persons who carry out transactions on an occasional basis in the context of the management of their private assets.
The choice of this specific regime is somewhat flawed by its lack of nuance and its poor adaptability to the exponential development of digital assets. In particular, the method of calculating the added value leads to reasoning on the basis of a single portfolio of digital assets, assuming that the various assets making up the portfolio are fungible… which means not differentiating their function. Is it relevant to include in the same portfolio NFT relating to a work of art, which is by nature non-fungible, and the units of a cryptocurrency, which is by nature fungible?
In fact, as the law currently stands, the added value tax regime on digital assets only makes sense for digital assets with a payment function. There is probably a case for designing a separate regime for digital assets with another function.
2.2. Equivalence regimes
Equivalence regimes are those that consist in apprehending digital assets by applying to them a regime that already exists and has been implemented for the sake of assets deemed equivalent. French law precisely operates such an approach to tokens that meet the definition of financial instruments. This is an important first step towards a function-based approach, but in some respects, it is still insufficient. Indeed, as the provisions stand, the reasoning is as follows for tokens: if their characteristics are equivalent to those of financial instruments, the regimes are aligned. In short, a security token follows the share regime if it confers a voting right or equivalent power on its holder. However, this is not always the case.
Therefore, a regime by equivalent could go further in the assimilation. Why not also consider the function performed by the token, beyond its mere characteristics: does not a token conferring the right to be consulted on certain decisions lead to the creation of an investor’s community around the issuer (neither a client nor a shareholder, but participating in the financing and development of the company)? Since the function performed by the token is indeed that of financing the company, why not conceive a regime equivalent to the added value of securities?
2.3. Neutrality-based regimes
They are the most complex to design. The neutrality being sought consists in avoiding that a given regime is neither dissuasive nor too attractive. For example, under the added value regime for digital assets, the exchange of digital assets without a complementary sum gives rise to a deferral of taxation and not to immediate taxation. Stablecoins thus act as a haven for those who have realised substantial unrealised gains on certain digital assets. On the contrary, professionals are required to record taxable products when they obtain digital assets in exchange for goods and services (including other digital assets). The analysis that cryptocurrencies obtained do not really constitute revenue as long as they have not been converted into legal currency units would provide the business with a questionable opportunity to defer tax and could be a source of distortion of competition.
However, the immediate taxation of a product derived from the perception of cryptocurrencies raises the issue of tax being levied independently of the collection of liquidity (fiat currency). Here, one way to relax such an immediate taxation rule would be to neutralise the charges related to the service provided. Thus, either the service provider intends to immediately deduct the charges related to the service provided to its client and must then bear the tax on the conventional “payment” made via digital assets, or the service provider renounces the deduction of charges and could defer the taxation of the “payment” in crypto. This would make companies more responsible by offering them a management decision, which would be enforceable against them (including in the event of an unfavorable change in the price of the crypto assets concerned), but also towards the administration.
Through these few examples, which are by no means exhaustive, we can see how a tax approach based on the functions performed by digital assets would make it possible to amend positive law and build a more secure tax framework. But these are only a few stones in an edifice that remains to be perfected.
This article "For a functional tax approach to digital assets (cryptocurrencies, tokens, NFTs...)" is part of the contributions made at the invitation of our firm and which proposes to experts from all horizons to share their visions on the "Big Bang" of Blockchains.
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Many thanks to Caroline Leroy-Blanvillain and Hermine Cappé for the English translation of this text originally written in French.
 OECD (2020), Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues, OECD, Paris, https://www.oecd.org/tax/tax-policy/taxing-virtual-currencies-an-overview-of-tax-treatments-and-emerging-tax-policy-issues.pdf. [return to text]
 OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard Public - Consultation Document, March 2022. [return to text]
 OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard Public, prev. : “Furthermore, the ability of individuals to hold Crypto-Assets in wallets unaffiliated with any service provider and transfer such Crypto-Assets across jurisdictions, poses a risk that Crypto-Assets will be used for illicit activities or to evade tax obligations”. [return to text]
 Written question no. 22200, Mr. Jérôme Bascher, JO Sénat 15 Apr. 2021, p. 2459 which notes that “NFTs are not currently subject to any specific regulation”. See, during the parliamentary debates on the adoption of the 2022 Finance Act, amendment I-1387 of the Finance Committee and amendment I-1894 of Mr. Pierre Person. See also, Rapport d’information sur la mise en œuvre des conclusions de la mission d’information relative aux crypto-actifs (Information report on the implementation of the conclusions of the fact-finding mission on crypto-assets), Dec. 2021, spec. p. 35. [return to text]
 The draft MiCA Regulation currently provides for the removal of NFTs that represent intellectual property rights or certify the authenticity of a single physical asset such as a work of art from the scope of the EU Regulation, paving the way for a tailor-made regime. [return to text]
 European Parliament, Committee on Economic and Monetary Affairs, The Report on the proposal for a regulation of the European Parliament and of the Council on markets in crypto-assets and amending Directive (EU) 2019/1937 (COM(2020)0593 – C9 0306/2020 – 2020/0265(COD)), pt 5 : “The proportionate treatment of issuers of crypto-assets and service providers, guaranteeing an equal chance of market access and development in the Member States, should be ensured. A Union framework should provide for proportionate treatment of the different types of crypto-assets and the issuing set-ups, thus allowing equal opportunities for market entry and ongoing and future development”. [return to text]
 On this point, the CJEU decided in relation to Bitcoin that it constitutes “a contractual mean of payment” and therefore “a direct mean of payment between the operators that accept it” (CJEU, 22 Oct 2015, Case C-264/14, Skatteverket v. David Hedqvist, para 42). See also the work of the VAT Committee: “the Commission services believe that the supply of any goods and services subject to VAT, remunerated by way of Bitcoin, should be treated in the same way as any other supply for VAT purposes. After the judgment of the CJEU in Hedqvist, it has become clear that in such circumstances Bitcoin acts as a means of payment and that no VAT should be levied on the value of the bitcoins themselves. The taxable amount of the goods or services supplied shall, according to Article 73 of the VAT Directive, be everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party.” Value Added Tax Committee (Article 398 of Directive 2006/112/Ec), Working Paper No. 892, Feb 2016. [return to text]
 N. Mathey, La nature juridique des monnaies alternatives à l'épreuve du paiement (The legal nature of alternative currencies in the payment test), RD bancaire et fin. 2016, dossier 41. [return to text]
 Ass. Nat., Rapport d’information en conclusion des travaux d’une mission d’information relative aux monnaies virtuelles (Report on the conclusion of the work of a fact-finding mission on virtual currencies), M. Eric Woerth, President et M. Pierre Person, Rapporteur, Jan. 2019. [return to text]
 Indeed, taxpayers who buy and resell digital assets on a regular basis are subject to industrial and commercial profits. As of 1st January 2023, the non-commercial profits regime will apply and the 2022 Finance Act has decided to assimilate to the non-commercial profits’ regime persons trading in digital assets, using means equivalent to those of a professional. Furthermore, the same regime of non-trading profits applies when the gains made by the taxpayer do not constitute a capital gain resulting from an investment transaction but are the consideration for the taxpayer's participation in the creation or operation of a virtual unit of account system (so-called “mining” activity). [return to text]