Bill Explained: France Plans to Tax Unrealized Gains on Cryptocurrencies
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Bill Explained: France Plans to Tax Unrealized Gains on Cryptocurrencies
This article will examine the potential impact on the cryptocurrency market by analyzing the current French tax system in conjunction with the latest proposed measures.
Navigating Web3 tides with focused insightsBy: TaxDAO
1. Introduction
On November 16, 2024, the French Senate introduced an amendment (Amendment I-128) during budget negotiations for 2025. The proposal aims to rename the "real estate wealth tax" as the "non-productive wealth tax" and expand its scope to include various assets such as digital assets, taxing these forms of "non-productive capital gains." This taxation specifically targets unrealized appreciation—value increases that exist only on paper, such as those arising from rising market prices of cryptocurrencies or other assets, even when not converted into euros or other fiat currencies through actual sale. In short, when an asset's market value rises but has not yet been sold and converted into cash, this unrealized gain would be classified as non-productive capital gain and become subject to taxation. This article analyzes the current French tax framework alongside the proposed amendment to explore its potential impact on the cryptocurrency market.
2. Background of the Amendment
2.1 Overview of France’s Current Tax System
2.1.1 Real Estate Capital Gains Tax and Real Estate Wealth Tax
Under Article 150U of the French General Tax Code, capital gains realized from real estate transfers are subject to capital gains tax (Impôt sur la Plus-Value, CGT), with rates ranging from approximately 19% to 34.5%, depending on holding period and other factors. Longer holding periods qualify for greater tax reductions, with possible full exemption after more than 22 years. If the property is a primary residence, capital gains are exempt. Additionally, social contributions apply at rates and under reduction rules similar to CGT, though with longer reduction periods. Overall effective tax rates decrease progressively with holding duration, reflecting principles of tax fairness.
The real estate wealth tax (Impôt sur la Fortune Immobilière, IFI) is an annual levy on the net value of real estate assets for individuals exceeding certain net wealth thresholds. Detailed in Articles starting from 954 of the tax code, IFI replaced the former solidarity wealth tax (ISF). It taxes French residents on their global real estate holdings, while non-residents are taxed only on French-situated properties. IFI uses a progressive rate structure ranging from 0.5% to 1.5%, aiming to curb real estate speculation and promote market stability.
2.1.2 Cryptocurrency Taxation
France already has precedent in taxing digital assets. As early as 2019, it implemented rules under Article 150 VH bis of the General Tax Code, stipulating that profits from selling Bitcoin or any other cryptocurrency exceeding €305 within a year must be reported and taxed for French tax residents. In 2023, France introduced a progressive element: starting from the 2023 tax year (reported in 2024), taxpayers in the lowest income bracket (annual income below €27,478) received preferential treatment, reducing their maximum rate to 28.2% from the standard 30%.
Currently, capital gains from cryptocurrency sales in France are taxed at a flat rate of 30%. Notably, exchanging one cryptocurrency for another is not considered a taxable event, a policy designed to encourage portfolio diversification without triggering immediate tax liabilities due to frequent trading.
2.2 Taxation of Unrealized Gains on Crypto Assets
Currently, French investors are required to pay taxes only when they sell digital assets and realize profits. However, under the proposed amendment, any increase in the value of crypto assets—even without a sale—would become taxable.
This proposed change comes amid global discussions and practical efforts by governments to regulate and tax digital assets. Countries are actively exploring effective ways to integrate cryptocurrencies into their tax systems, adopting diverse approaches based on national contexts. Some treat crypto similarly to traditional investments, while others have created specialized tax regimes. For example, the Czech Republic unanimously passed legislation exempting Bitcoin held over three years from capital gains tax; Denmark’s Tax Council recommended imposing a 42% tax on unrealized crypto gains starting in 2026, applicable retroactively to all crypto purchases since inception, allowing offsetting losses against gains; in contrast, the U.S. requires tax payment only upon profitable disposal; Italy increased its crypto capital gains tax from 26% to 42% to boost government revenue; Kenya collected over $77 million in taxes from 384 crypto traders in the first half of 2023 and plans to enhance its tax system through technology integration. Against this backdrop, the French Senate’s move to tax unrealized crypto gains is not a sudden whim but a logical step aligned with the global trend toward building comprehensive crypto tax and regulatory frameworks.
3. Key Provisions of the Amendment
3.1 Renaming and Expansion of Taxable Scope
The amendment renames the existing real estate-focused wealth tax as the "non-productive wealth tax," expanding the taxable base beyond real estate to include undeveloped land, liquid assets, financial instruments, tangible movable property, intellectual property, and digital assets. This rebranding and expansion aim to broaden the wealth tax (IFI) base, better aligning the tax system with France’s evolving economic landscape. Beyond real estate—the sole previous basis—the new tax will also cover digital assets (e.g., cryptocurrencies) and liquid funds in bank accounts, provided they are not used for economic activity. Furthermore, the amendment introduces tax incentives for productive economic investments, such as constructing rental housing or supporting small and medium enterprises (SMEs).
3.2 Inclusion of Digital Assets
Notably, the amendment explicitly includes digital assets within the taxable scope, citing Bitcoin as an example. A newly added provision following Article 3 specifies that digital assets fall under the non-productive wealth tax regime. Specifically, under revisions to “Book I, Part I, Title IV, Chapter II-bis” of the General Tax Code, Article 965 is now defined as follows: "The tax base for the non-productive wealth tax consists of the net value on January 1 of each year of assets belonging to one of the following categories, directly or indirectly held by the persons referred to in Article 964 and their minor children (when legally managing such children's assets): … Under this amendment, the following shall be specifically included in the revised tax base: undeveloped land not used for economic purposes… liquid funds and similar financial investments… tangible movable property… digital assets (such as Bitcoin)…" Legally, digital assets are now clearly classified as part of non-productive wealth and thus subject to wealth tax. Consequently, Bitcoin and other cryptocurrencies will be treated like real estate—subject to tax both upon transfer (on realized gains) and annually on January 1 based on their net market value. This net market value is calculated after deducting associated costs.
Regarding implementation timing, the amendment mandates replacing the real estate wealth tax with the non-productive wealth tax starting in 2025. Once enacted, digital assets will formally enter the tax base beginning in 2025. While digital assets are included, the amendment does not specify a tax threshold. However, overall reform directions suggest raising the threshold to avoid burdening households whose nominal wealth may exceed limits due to inflation rather than genuine affluence. Moreover, no exemptions for digital assets are mentioned. Given the amendment’s goal of encouraging productive investment—and potential future tax breaks for specific productive activities—it remains to be seen whether France might introduce tax relief for certain types of digital asset investments.
4. Controversy Surrounding Taxation of Unrealized Capital Gains
In fact, there has long been debate worldwide over whether unrealized capital gains should be taxed, centering on whether taxing potential, unrealized gains—as opposed to realized ones—is fair or efficient.
4.1 Advantages of Taxing Unrealized Gains
Proponents argue that taxing unrealized gains can significantly increase tax revenue. For instance, the U.S. Federal Reserve estimates that the wealthiest 1% of Americans hold over 50% of all unrealized capital gains. A research team at the University of Pennsylvania further estimated that taxing these gains could raise up to $500 billion over ten years. Beyond revenue generation, three additional benefits are cited: First, addressing tax avoidance by high-net-worth individuals who hold appreciating assets (stocks, bonds, real estate, etc.) indefinitely, thereby deferring or avoiding taxes. One common strategy is "buy, borrow, die": investing in appreciating assets, financing lifestyles via loans instead of selling, and passing assets to heirs. Even ordinary investors can indefinitely defer taxes by simply not selling. Second, mitigating wealth inequality through redistribution, promoting social equity. Third, improving economic efficiency by incentivizing investment in more productive sectors.
4.2 Disadvantages of Taxing Unrealized Gains
The drawbacks primarily manifest in four areas. First, challenges in accurately valuing assets—especially illiquid or less-traded ones—whose market prices are hard to determine or highly volatile, making valuation complex, time-consuming, and costly. Second, liquidity issues: individuals whose wealth is tied up in non-cash assets may face cash flow shortages when forced to pay taxes, potentially requiring asset sales or debt accumulation. Third, concerns about double taxation: the same asset could be taxed during holding (due to appreciation) and again upon sale (as realized gain), potentially discouraging long-term investment. Fourth, potential negative economic consequences, including reduced activity in illiquid markets, heightened investor risk aversion, decreased investment in high-growth, volatile assets, and capital flight to jurisdictions with more favorable tax regimes—undermining national competitiveness. In sum, implementing an unrealized capital gains tax faces significant hurdles related to valuation accuracy, liquidity constraints, double taxation risks, and broader economic impacts.
5. Impact on Crypto Holders and the Market
5.1 Impacts on Cryptocurrency Holders
Many French crypto investors have expressed concerns about the fairness of the amendment. Unlike real estate or stocks, cryptocurrencies lack consistent valuation benchmarks and often experience extreme volatility. This policy may push investors toward stablecoins or offshore exchanges to avoid heavy tax burdens.
5.1.1 Increased Tax Burden
Holders will face dual tax pressures: paying capital gains tax upon selling crypto and an annual wealth tax based on the net market value of their holdings. This will substantially increase the real cost of owning and trading cryptocurrencies.
5.1.2 Distortion of Investment Behavior
Higher taxes may prompt holders to adjust strategies. Long-term holders might sell earlier to avoid future tax obligations, while short-term traders may become more cautious in balancing returns and tax costs. Although proponents argue that paper profits confer economic benefit and thus justify taxation, this logic falters with highly volatile assets like crypto, where price surges can reverse into losses within hours or days. In such cases, taxing unrealized gains could force investors to liquidate positions at inopportune times, effectively locking in losses.
5.2 Market Implications
Increased tax pressure could reduce market liquidity for cryptocurrencies. Taxing unrealized gains creates liquidity strain for investors who haven't sold but still owe taxes—a particular concern in crypto markets prone to sharp value swings. Investors face cash flow pressure before tax deadlines; lacking sufficient cash, they may be forced to sell crypto, worsening financial stress and potentially amplifying market volatility. Additionally, some investors may reduce trading frequency or exit the market entirely due to excessive tax burdens, leading to lower overall market liquidity.
5.3 Global Implications
From a global perspective, France—as a key EU member—often sets precedents influencing European and even global crypto markets. Policy changes in France could prompt other countries to reassess their own tax frameworks. For example, the EU is currently finalizing the Markets in Crypto-Assets (MiCA) regulation, which represents a consensus among EU nations on crypto oversight. France’s amendment may encourage other EU members—or the bloc as a whole—to consider similar tax measures. France’s approach could also influence major economies like the U.S. and Japan, potentially reshaping the global tax environment for crypto investors.
6. Conclusion
As the cryptocurrency market matures, effective regulation and equitable taxation have become shared challenges for governments worldwide. Although this amendment remains preliminary and not yet law, its underlying tax logic and policy direction warrant serious attention from crypto holders and industry participants. Globally, regardless of whether countries impose separate capital gains taxes, capital gains are generally treated as part of taxable income. In practice, most jurisdictions—including Singapore and Hong Kong, China—that seek to attract financial capital set capital gains tax rates at 0%. Where rates are non-zero, taxation typically applies only when gains are "realized," i.e., when paper profits are converted into actual proceeds. Most countries follow this model for crypto capital gains, and even academic and policy experts rarely advocate taxing unrealized crypto gains. Thus, France’s proposal stands out as particularly distinctive and unprecedented.
Despite its uniqueness, the amendment can be interpreted through two lenses: its complementary mechanisms and overarching policy goals. On one hand, taxing unrealized crypto gains is not isolated but paired with loss-offset provisions—for instance, the amendment specifies taxation on *net* unrealized gains. On the other, it aligns with France’s recent trend of strengthening crypto regulation. The decentralized nature of cryptocurrencies poses unprecedented challenges for tax administration, and taxing unrealized gains offers a way to simplify compliance, serving as a tool for enhanced governmental oversight.
While the amendment may impose tax burdens on crypto holders, it holds significance for improving tax systems and fostering healthier market development, reflecting a growing global reconsideration of how to tax cryptocurrencies. Going forward, as international regulatory scrutiny intensifies, we can expect a more standardized and transparent cryptocurrency market.
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