Last month, the French Council of State announced that profits from cryptocurrency sales would now be classified as capital gains from “moveable property”. This is a radical decision that will substantially reduce the taxes associated with cryptocurrency sales to a flat rate of 19%. It comes on the heels of several other initiatives taken by the French Government to create a legal framework for cryptocurrency transactions.
The judicial body, which advises the government on judicial matters, issued the decision following a court challenge in 2017. The taxpayers who launched the suit took issue with a differentiated tax regime that had been introduced back in 2014. Under this system, cryptocurrency sales could be treated as either commercial or non-commercial profits depending on the activity. As a result, individuals faced different tax rates with a maximum levy of 45%.
The new tax system does contain one important exclusion – data mining. This refers to activities related to the verification of cryptocurrency transactions and the process by which they are added to the public ledger, also known as the blockchain. Earnings from this activity will be taxed as non-commercial profits while income will be treated as commercial profit.
This decision is just the latest example of the French government’s interest in blockchain-based activity. Last December, France announced that unlisted securities could be traded using blockchain technology. This open-minded approach has been advocated by some of France’s most important regulators. For example, the head of France’s stock market regulatory body Authorité des Marchés Financiers (AMF), Robert Ophèle, stated that he believed cryptocurrencies could fulfil a legitimate business need in France.
Bruno LeMaire, France’s minister of the economy, has also gone on the record asserting that “France will not miss the blockchain revolution”. To that effect, he established a working group in January to examine how to introduce a regulatory regime that supports cryptocurrency activity while also stamping out tax evasion, money laundering, and terrorist financing.
Perhaps most significant is France’s decision to introduce licenses for initial coin offerings (ICOs). ICOs are a nascent fund-raising activity whereby firms issue a new form of cryptocurrency in exchange for money or more established cryptocurrency to help finance their venture. Individuals invest in the hope that the firm is successful and the cryptocurrency will rise in value. Under this licensing system, ICOs can voluntarily register with the AMF provided they comply with a series of best practices outlined by the regulator. This increased structure of the industry will help legitimise companies engaged in ICOs and facilitate their interactions with potential investors, banks, and accounting firms.
So why has France decided to take this regulatory plunge? The country is hoping to create a flexible but regulated environment in order to lure fintech companies away from London after Brexit next year. In London alone, fintech companies employ more than 60,000 workers and add around £7 billion (circa €8 billion) to the economy. Even just a small slice of that pie would provide considerable economic benefits for France.
However, the competition for fintech business is heating up. Last spring, Malta introduced a national strategy to promote the use of distributed ledger technology. The country has also published a proposed rulebook for cryptocurrency-based investment funds. Malta’s progressive stance on financial innovation and technology led two cryptocurrency exchanges, OKEX Technology Co and Binance, to relocate their headquarters to the island.
The decision to bring blockchain-based technology under the purview of regulators and subject its related activities to a sensible tax system could give France a leg up in the competition for fintech business. The country’s president wants France to be a start-up nation that works with and for start-ups, and these recent initiatives will go a long way to create the right environment for entrepreneurial, cutting-edge business in France.
