French Finance Act for 2022 - Focus on digital assets

Following the adoption of the Finance Act for 2022 on December 15, 2021, the law was published in the Official Journal on December 31, 2021.

It provides for two new measures on digital assets aimed at enriching and simplifying the tax regime for disposals of digital assets by individuals. 

Profits from transactions in digital assets considered to be derived from a non-commercial activity (FA art. 70)

The current regime distinguishes the taxation of capital gains on digital assets realized by individuals in the context of the management of their private assets, from those derived from a professional activity and subject to the regime of industrial and commercial profits ("BIC").   

In the absence of a legal definition, the "habitual" and "occasional» character is used by the tax administration to qualify the professional nature of the activity and the application of the correlative BIC regime. Administrative guidelines state that these criteria result from the examination, on a case-by-case basis, of the factual circumstances in which the purchase and resale operations are carried out (e.g., time limits separating the dates of purchase and resale, the number of digital assets sold, the conditions of their acquisition, etc.).

In practice, these criteria are considered difficult to apply to digital assets due, in particular, to (i) the high volatility characterising the digital asset market and (ii) the frequency of transactions in digital assets that is higher than that of traditional BIC activities.

To overcome the uncertainties related to the qualification of the taxpayer's professional activity, Article 70 of the Finance Act aims to align the regime of profits from the purchase, sale and exchange of digital assets with that of stock exchange transactions provided for in Article 92 of the CGI.

Thus, the professional nature of the activity resulting from operations on digital assets will have to be assessed in the light of conditions similar to those characterising an activity carried out by a person engaged in stock exchange transactions on a professional basis. As such, these profits will be considered as derived from a non-commercial profession or as income assimilated to non-commercial profits (BNC).

In practice, this new measure should allow a more objective assessment of the activity (professional or not) based on criteria more adapted to the activity of buying and selling digital assets. These criteria are currently specified, for stock exchange transactions, by administrative guidelines (BOI-BNC-CHAMP-10-10-20)  and are based in particular on  the  superiority of the overall annual sum of capital gains from the activity with regard to the other income of the tax household,  on the  use of professional tools,  on  the  complexity of the operations carried out personally by the taxpayer(non-exhaustive list).  

It will be interesting to see whether the tax administration provides further guidelines on the criteria to be used for more specific transactions involving digital assets.  

In any event, this alignment should make it possible to provide more certainty, from a tax standpoint, on the regime applicable to transfers made by individuals. 

These new provisions will apply to disposals made on or after 1 January 2023.

Option at the progressive income tax scale for individuals selling digital assets (FA art. 79)

The current regime introduced by the Finance Act for 2019 taxes capital gains from the sale of digital assets at a single flat-rate levy of 30% (i.e., tax rate of 12.8% plus 17.2% for social security contributions – “flat tax").

Article 79 of the Finance Act, inspired by the regime of capital gains realized on the sale of securities, opens the possibility to individuals making capital gains on disposals of digital assets to opt for taxation of these capital gains at the progressive scale of income tax.

This measure was introduced with the aim of reducing the taxation of the most modest taxpayers penalised by this flat rate of 12.8%. For example, individuals whose taxable income is  (i) below 10.225 euros with a tax rate of 0% or (ii) between 10.225 and 26.070 euros with a tax rate of 11% are currently taxed at the rate of 30% (including 12.8% tax) on the disposals of digital assets they make.

By opting for the progressive scale, the latter will have their earnings taxed (i) at the rate of 17.2% (i.e., social security contributions) and (ii) at the progressive scale of income tax, i.e. an overall tax rate of, respectively, 17.2% or 28.3%  depending on whether the taxpayer falls into the 0% or 11% brackets. Other taxpayers will be able to continue to choose the single flat-rate levy of 30%, which is more favourable for the upper brackets.

The new provision specifies that the option must be made expressly by the taxpayer when filing his annual income tax return and at the latest before the expiry of the reporting deadline. This option should be reflected in a checkbox by the taxpayer on his tax return and should be renewed in the same way each year. In the absence of an option, the flat tax of 30% would remain applicable.

It should be noted, however, that after the deadline for filing the income tax return, the option would become irrevocable and global for the tax year. Therefore, all capital gains derived from the disposal of digital assets will have to be included in the base of the overall taxable net income subject to the progressive scale for the current calendar year.

This new arrangement will apply to disposals made on or after 1 January 2023.