TBW Premium #1: The ultimate guide to crypto taxation

‍

What's going on at the Autorité des marchés financiers (AMF)? In the space of a few months, the stock market watchdog, despite not being renowned for being anti-crypto, has lost its in-house experts one by one. There has even been a haemorrhage: of the four members of the 'historic' team, none remain! While the reasons for these departures are not known, some point to the arrival last July of Jérôme Reboul as deputy secretary general of the AMF, in charge, among other things, of the fintech and innovation division, which oversees crypto issues. "He is not at all favourable to the ecosystem. His appointment was a bad signal", stresses a good connoisseur.

👉 Behind the scenes of Binance's arrival in France

After months of (false) suspense, Binance made its arrival in France official yesterday at PBWS. The crypto giant, which until then had only a few representatives in France (David Prinçay 👋 ), pulled out all the stops. The group of Chinese origin is going to create a crypto incubator at Station F, take over premises in Paris (400 m2, according to our information) and recruit in spades. We're talking about at least several dozen people by the end of the year! What's next? Some of the executives from Singapore and Dubai are also expected to relocate to Paris. The aim is simple: to make France the Group's headquarters. But it will still have to battle on one point: its registration as a digital asset service provider (DASP). According to our information, the group's anti-money laundering policy is still making the AMF tick...

👉 WisElement raises €1.6 million

Since its creation in 2016, WisElement has been arousing curiosity. Based in the Paris region, the start-up has developed an ingenious boiler system that uses the heat released by bitcoin mining machines. A technology that is attracting investors! According to our information, WisElement has just raised €1.6 million to finance the deployment of its Sato boiler (from €17,000). A large part of the luquidities is being contributed by Noia Capital, one of the first European funds specialising in cryptos. Famous business angel Alexandre Yazdi (known for founding Voodoo, a French mobile gaming unicorn) is also on board. With this new money, WisElement aims to strengthen its teams and sell 100 new boilers in 2022 as a result (30 sold out in 2021).

THE BIG DOSSIER

The ultimate guide to declaring your cryptos

👉 The news. It's the start of the tax return campaign.

👉 Why it matters. Do we really need to spell this out for you? ‍

👉 The context. Every year it's the way of the cross, so we've marked out the crossing for you with lawyer Alexandre Lourimi (ORWL).

‍

Take a deep breath, the dive will go well!

🐳 I bought my first cryptos in 2022

You don't have to do anything because only transactions that took place in 2021 are affected by the 2022 declaration (opening an account on a platform and selling cryptos). The trouble will start next year, you lucky bastard!

🐳 I have an account on a platform established in France

Good news too, you don't have to declare anything either (if you didn't sell anything in 2021). There's no need to inform the tax authorities that you have an account with Coinhouse or Deskoin, as they can check it themselves.

🐳 I have an account on a foreign exchange platform

Having an account on Binance or Crypto.com is equivalent to having a bank account in Switzerland. You are obliged to report it to the tax authorities, but without disclosing what you have on it (catch your breath).

You need to tick the "Miscellaneous" box in step 3 of your tax return where foreign accounts are mentioned. This action triggers the opening of another window where you can specify what type of account it is (in this case a digital asset account ) via the form n°3916 bis.

"This obligation concerns all accounts opened, held, used or closed in 2021, both on exchange platforms (Kraken, Coinbase, FTX, etc.) and on platforms offering returns (BlockFi, Celsius, Nexo, etc.)" explains Alexandre Lourimi. "This declaration does not concern non-custodial wallets (Metamask, Ledger, etc.)."

Here is an example for Coinbase:

Account name: Coinbase

Institution designation: Coinbase Europe Limited

Institution designation complement: www.coinbase.com

Account number: this number does not yet exist on Coinbase

Account characteristics: private/professional use and single/joint/collective account

Opening date: DD/MM/YYYY

Address: 70 Sir John Rogerson's Quay, Dublin D02 R296 (Ireland)

🐳 What do you risk if you don't fill in a foreign account?

You risk a fine of 750 euros per undeclared account or 125 euros per omission or inaccuracy, up to a maximum of 10,000 euros per declaration.

These amounts are doubled when the value of the assets exceeds 50,000 euros. Enough to make you not want to "forget"!

🐳 How do you declare your capital gains or losses?

You must then report to the tax authorities all sales of cryptos made in 2021 against anything that wasn't cryptos (a legal currency such as the euro, or the purchase of a good or service).

No platform will do this for you: you have to do it yourself. And one important point: the fact that you have a capital loss does not exempt you from this step!

These transactions must be reported on Schedule 2086. To access this, you need to click on "Declarations ANNEXES" in step 3 of your return (at the very top of the page where you indicated that you had a digital asset account abroad).

For individuals, capital gains on the sale of digital assets are subject to a single flat-rate tax regime of 30% (12.8% income tax and 17.2% social security contributions).

🐳 Do I still have to make a declaration if I haven't made a transfer from a platform to my bank account?

The time of payment of the euros into your bank account does not count. It is the act of exchanging cryptos for euros (or any other traditional currency) that generates tax.

🐳 If I simply exchanged my cryptos for stablecoins, am I taxed on these transactions?

No, because a stablecoin (USDC in $ or Lugh in €) is a crypto like any other. This is one hell of an advantage: crypto-crypto exchanges are not taxed for individuals.

🐳 How do you calculate the amount of your capital gain or loss?

Beware, stunt reserved for professionals! You will only have to calculate your gains or losses yourself (the taxman will do it for you) if you exceed 100 transactions per year.

Don't take into account the "transfer costs" and "balance received or paid" boxes. They are of no use in your case.

The overall capital gain is taxable only if the total of the disposals made is more than €305. If you're below that, you can turn your flippers.

🐳 What do you risk if you make an unintentional mistake? What if it's premeditated?

You risk an adjustment and the obligation to pay the difference between the tax due and the tax actually paid. "But if it's unintentional, the penalties could be largely waived," reassures Alexandre Lourimi.

If you haven't filed your return, the penalties can be up to 10% of the amount reassessed. Interest on late filing, at a rate of 0.2% per month of delay, could be halved if you spontaneously regularise your tax return under the "right to make a mistake". If you have deliberately committed fraud, you risk penalties of 40%. However, the tax authorities must show that you could not have been unaware that you were committing fraud. When it comes to the taxation of cryptos, however, deliberate failure remains difficult to characterise.

"When the law presents a very large number of uncertainties, the tax authorities cannot legitimately expect taxpayers to have a clear view of the applicable tax regimes (passive income, NFT, capital gains calculation formula, etc.)," points out Alexandre Lourimi. On the other hand, you may be accused of deliberate failure to comply if you have sold a significant number of cryptos.

The most extreme case occurs when the tax authorities find that you have taken action to conceal the omission (presentation of false invoices for crypto purchases, use of tools to disguise the origin of the cryptos, etc.). In such cases, you may be penalised by penalties of up to 80% of the amount adjusted. Still interested?

🐳 In what cases do you risk being requalified as a professional investor?

The flat-rate capital gains tax regime for digital assets ceases to apply when you carry on a digital asset trading activity under conditions similar to those of a professional.

Generally speaking, the amount of capital gains alone is not a sufficient criterion for tipping over into this category. "The professional nature of the activity results from a case-by-case assessment of each situation, based on a cluster of indicators including the amount of income generated, the frequency of transactions, but also and above all, the sophistication of the activity and its level of rationalisation (risk management, investment method, complex tools, etc.)," warns our expert.

In the event of requalification, the digital asset trading activity is taxed in the industrial and commercial profits (BIC) category. It is much less advantageous because the neutralisation of exchanges between digital assets is no longer applicable. Every sale of cryptos, whether against euros or cryptos, will have to be accounted for.

"The taxable income each year is equal to the sum of all capital gains and losses realised during the year. This result is subject to the progressive income tax scale (bracket from 0 to 45%) and, at best, to social security withholdings at the rate of 17.2%", points out Alexandre Lourimi.

Don't worry, it's almost over.

🐳 You've sold an NFT, how do you report this transaction?

Determining how NFTs are taxed involves looking at their legal status. In reality, the NFT itself is of little importance. We need to look at what it represents in practical terms. NFTs that represent 'rights' over the issuer could be described as digital assets. "In that case, the applicable taxation would be that of digital assets," explains Alexandre Lourimi.

However, it is likely that a large majority of NFTs do not fall into the category of digital assets. "One of the most notable consequences is the loss of the benefit of neutralising exchanges between digital assets," notes the lawyer. In this case, the purchase of an NFT in cryptos no longer constitutes a crypto-crypto exchange since the NFT cannot be qualified as such. Each purchase of an NFT in cryptos therefore constitutes a taxable disposal of the cryptos used to purchase the NFT...

With regard to the capital gain on the disposal of NFTs, two main regimes can be envisaged.

👉 Art object or collector's item. The flat-rate tax on precious objects could potentially apply if the NFT qualifies as an art object or collector's item. In the case of collections of profile photos for social networking sites, it is highly unlikely that the item would qualify as an objet d'art. However, for collections as emblematic as the Bored Ape (or the CryptoPunks), classification as a collector's item could be considered, although it remains rather implausible. If this were the case, you would have the choice between taxing the capital gain at the rate of 36.2% or taxing the amount of the disposal at the rate of 6.5%.

👉 Movable property. If they cannot be classified as such, NFTs should fall under the system for capital gains on movable property, which provides for taxation of the capital gain at a rate of 36.2%, but also an exemption for disposals where the amount does not exceed €5,000 and a deduction for the length of time held of 5% per year of ownership beyond the second year of ownership (i.e. total exemption after 22 years of ownership). This is the regime that seems most plausible for all NFTs that do not fall under the definition of a digital asset.

🐳 Have you earned income from performance services (lending)?‍

Already, don't think that as long as you stay in cryptos, there's no taxation! "This idea is very widespread because the capital gains tax regime on digital assets neutralises taxation in the event of exchanges between digital assets," points out Alexandre Lourimi. But, in the context of passive income, your realised gain is often not a capital gain, as it does not result from the difference between the sale price of an asset and its purchase price.

You therefore need to distinguish your passive income generated as part of decentralised services from other passive income.

👉 Returns from decentralised protocols (Aave, Compound, etc.). Your passive income is generated through exchanges between digital assets. You deposit tokens in a pool in exchange for other tokens that represent your stake in the pool (LP tokens). When you decide to withdraw the tokens deposited, you exchange the LP tokens for an amount of tokens corresponding to your stake in the pool. If the value of the pool has increased, you will make a profit. In this case, you are technically still exchanging digital assets without incurring any tax.

👉 Returns from centralised services (Coinhouse, Just Mining, Nexo, etc.). The tokens you earn are taxed when you receive them because they constitute interest received in return for making capital available. This interest is therefore taxed at 30%.

"In practice, it can be particularly complex to track the acquisition value of passively acquired tokens: firstly, not all services provide sufficiently detailed information, and secondly this income is paid out very regularly (sometimes every minute)," insists Alexandre Lourimi. "Now, referring to the asset price at each acquisition is humanly impossible, which is why many are opting for pragmatism to declare these cryptos only when they are resold in euros," he declares.‍

🐳 How to declare staking income?

This income comes from making tokens available to participate in the operation of a protocol (e.g. ETHs are staked to protect Ethereum 2.0). It is therefore likely that the "acquisition gain", i.e. the value of the cryptos on the day they are received, will not fall into either of the two categories mentioned above.

"It is therefore preferable to opt for the non-commercial profits regime (progressive income tax scale and social security deductions at 17.2%)," advises Alexandre Lourimi.

The same applies to income from mining.

🐳 How do you declare a sale of tokens from an airdrop?

In principle, if you receive an airdrop, you are not automatically taxed. Why not? Because an airdrop is purely occasional, unpredictable and random. In other words, the gain you might make does not have the characteristics of taxable income.

There are two options for declaring them:

At worst, the cryptos you received as part of an airdrop are included in the value of your portfolio and are only taxable when a taxable transfer takes place, against euros for example. In this case, their total value would only be taxable at that time at the rate of 30%. 🙄

At best, the euro value of your cryptos when you receive them could be added to the total acquisition price of your portfolio. In this way, only the difference between their receipt value and their value at the time of a taxable transfer would be taxable. The receipt value would never be taxed. 🤑

🐳 What will change in 2023?

While there is nothing new for this 2022 edition, a few changes are expected for 2023 (for 2022 income). You will have the choice between flat-rate taxation at 12.8% (the only formula currently in force) or application of the progressive income tax scale. In both cases, you will have to add social security contributions at the rate of 17.2%.

This option will only be of interest to those of you in the 0% tax brackets (income below 10.225 for 2021) or 11% (income between €10,226 and €26,070).

In addition, for those of you who are trading professionals, you should be aware that you will come under the non-commercial profits (BNC) tax category.

THE BIG QUESTION

Can Ledger be affected by European regulations on "unhosted wallets"?

CEO Pascal Gauthier answers a question posed by The Big Whale community. This one concerns the European Parliament's adoption on 31 March of an amendment requiring exchanges to verify the identity of crypto wallet owners.

Will the regulation on "unhosted wallets" impact your business? ‍

In fact, not really. Ledger has such a solid technological base that we'll be able to adapt whatever the regulations. We're already working on "proof of ownership", a process that will enable you to prove to your bank that you own your cryptos. Today, people make do with screenshots of their wallet. Tomorrow, we'll be able to make a proof of ownership with our decentralised identity card in one click on our Ledger, saying "here I am Pascal Gauthier, I have so much and I can prove it". This will happen at the end of 2022, beginning of 2023.

So who is going to be penalised by this regulation?

Beyond isolated cases, it's the entire European industry that is going to be penalised. It's very complicated to develop an ecosystem with hostile regulations. You have to lay down the rules of the game, not prevent them from playing. We're giving the Americans a blank cheque to take the lead in the European market. Europe absolutely must react. After missing out on Web2, Europe has everything to gain from Web3.

What do you think the problem is?

For me, we have a real philosophical problem. We're going through a technological revolution and Europe doesn't seem to have grasped it yet. We often talk about Europe as if there were a great commander in chief, but that's not how it works. We're up against some dogmatic MEPs: cryptos don't fit into their software, they don't understand what's going on. They're not in favour of freedom and decentralisation, and the crypto ecosystem is going to have to get its act together. The risk is that Europe will wear its name "Old" continent too well.