IMPORTANT: the information given below is general in nature. For an analysis of your specific situation, consult a lawyer.
An extremely important question.
Probably the first question to ask yourself when it comes to crypto taxation!
Indeed, the tax consequences differ completely from one regime to the other and are generally extremely heavy for professionals (income tax at brackets that are sometimes very high and, as is too often forgotten, social security contributions to be paid!).
Would you like to know more and, above all, understand more concretely what these very heavy consequences are? Take a look at the worked example with figures at the end of the article.
All the more so since many individuals fall under the professional regime without knowing it and therefore without having filed the necessary returns: a whole host of penalties will therefore be added to this very heavy taxation. In some cases, the consequences can therefore be dramatic.
So, Have Our Current Rules Clarified This Very Important Question?
Yes, in part, but not entirely (as is often the case in law).
Until now, there was only one single sentence on this subject, taken from what is known as administrative doctrine (in practice, officials at Bercy, the French Ministry of Finance, who set out the tax rules in principle with greater precision than the law does).
This sentence is:
"The criteria of habitual or occasional exercise of the activity result from a case-by-case examination of the factual circumstances in which the purchase and resale transactions are carried out (the time between the purchase and resale dates, the number of digital assets sold, the conditions of their acquisition, etc.)."
This text therefore sets out three (non-exhaustive) criteria: the time between purchases and resales, the number of digital assets sold, and the conditions of their acquisition.
However, as the criteria listed are non-exhaustive, the tax authorities may add others as they see fit.
Classification is therefore made on a case-by-case basis, "depending on who you are".
So we are not really much further forward.
However, there is something new: the law has just linked the professional regime for crypto to the professional regime for stock market transactions.
Seen from afar, this may not look like much: in fact, quite the opposite, it is an important step forward, because a great deal of detail is available on the professional regime for stock market transactions. By linking the professional crypto regime to the professional stock market regime, it would seem that the criteria applied to the stock market could very probably be transposed to crypto.
The boundary for stock market transactions is precise: broadly speaking, only the most blatant cases will be treated as professional. If this approach is transposed to crypto, it could mean that only the most blatant cases in crypto will be treated as professional.
That is the summary: no precisely defined line to date, but it is nevertheless becoming clearer. Only the most blatant cases should be treated as professional (and no longer more or less anyone, depending on who they are).
For those who want to go further, here is in more detail what the new law may potentially bring to the question of the boundary between professional and non-professional.
Going a Little Further
No more arguments based on a high volume of transactions.
Some individuals do indeed face the reclassification of their activity on the grounds that they carry out a large number of transactions using their phone and make substantial capital gains.
Article 79 of the 2022 Finance Act (Law no. 2021-1900 of 30 December 2021) appears to be intended to remove this legal uncertainty.
From 2023, whether transactions involving digital assets are professional or non-professional will be assessed no longer according to whether they are habitual, but in light of the conditions under which they are carried out.
As a result, the frequency of transactions, as well as the amount of capital gains made, should in principle no longer make it possible to classify transactions as "professional".
As stated in the explanatory memorandum to the new law, it could therefore follow that carrying out transactions on digital assets "under conditions similar to those characterising an activity carried out by a person engaged in it on a professional basis" could in principle only concern the most blatant cases, such as, for example, persons:
- benefiting from preferential transaction fees in return for a commitment to trade a certain volume of digital assets per month;
- or using professional tools or complex trading practices.
Indeed, for the application of the stock market transactions regime, to which the crypto regime is now "linked", the tax authorities have specified that, in order to assess whether transactions are carried out under conditions similar to those characterising an activity carried out by a person engaged in this type of transaction on a professional basis, the possession, command and use of specialised information and trading techniques, as well as their organised pursuit for the benefit of numerous and sophisticated stock market transactions (hedging, carry-over, etc.), are essential criteria.
The range of persons who may be classified as professionals is therefore much narrower, and only certain very specific profiles would be concerned.
Unwitting Professional: What Are the Risks? The Consequences? A Simple Worked Example Concerning 2022 and Earlier Years (from 2023, New Regime, with a Somewhat Clearer Boundary Between Professional and Non-Professional). Important: 2022 and Earlier Years Fall Within the Scope of Tax Audits in 2023 and Subsequent Years (a Tax Audit Always Takes Place After the Fact, Often Several Years Later).
Let's get straight to the point with a simple but effective worked example:
A person bought and sold crypto from 2019 until 2021. In 2019 and 2020 he was fairly quiet. It was in 2021 that things took off with the bull run(s) at the beginning and end of the year.
He bought and sold a huge amount of crypto, did lending, farming and staking, was on certain whitelists and therefore had early access to certain highly hyped altcoins, etc.
Despite a few losses on some altcoins, his 2021 gains were ultimately high: €1,000,000.
In 2019 and 2020 he had started out quietly; those years show a few losses and a few gains, amounting to a few thousand euros of gains or losses; those years are not very significant and are of little real interest to the tax authorities, who focused on 2021.
After a detailed line of argument, the tax authorities declare that this person is a professional for 2021.
Indeed, the tax authorities state that this person had no real main activity apart from crypto (he had some salary and micro-enterprise income, but very little compared with his crypto gains). The tax authorities also state that the transactions carried out were very numerous, and that participating in various centralised or decentralised yield systems, or being in certain groups/whitelists, requires specific and advanced skills and provides access to privileged information or opportunities. The tax authorities add that the crypto gains are moreover very high: €1,000,000.
For all these reasons, the tax authorities consider him to be a professional.
The tax authorities therefore apply the following reassessments:
Gains: €1,000,000.
2 possible scenarios:
1: the person had previously declared their gains under the 30% flat tax and had therefore paid €300,000
2: the person had not declared anything previously
1: the person had declared their gains under the 30% flat tax and had therefore paid €300,000
15% increase for not being a member of an approved management centre/association: the taxable amount rises to €1,150,000 (the person had not joined an approved management centre/association since they did not think they were a professional, so their taxable gains are increased by 15%).
Income tax + exceptional tax on high incomes: approx. €550,000 in total.
10% surcharge for good faith (the person did not try to "hide" and simply got the tax category wrong, believing they were subject to the flat tax when they fell under the professional regime): €55,000
Social security contributions: approx. €300,000.
Total: 550,000 + 55,000 + 300,000 = €905,000. But €300,000 has already been paid:
Total due: 905,000 – 300,000 = €605,000.
2: the person had not declared anything
15% increase for not being a member of an approved management centre/association: the taxable amount rises to €1,150,000 (the person had not joined an approved management centre/association since they did not think they were a professional, so their taxable gains are increased by 15%).
Income tax + exceptional tax on high incomes: approx. €550,000 in total.
80% surcharge for undeclared activity (the person had not registered as a business since they did not think they were a professional, so in the eyes of the tax authorities they have an undeclared activity): €440,000
Social security contributions: approx. €300,000.
Total due: 550,000 + 440,000 + 300,000 = €1,290,000.
Yes, €1,290,000! For gains of €1,000,000!
At this stage, it will of course be necessary to fight to contest the professional classification and, at the very least, try to reduce the penalties.
But the battle will be long and difficult.
A great many useful steps can generally be taken: referral to the tax inspector's line manager, referral to the departmental contact officer (interlocuteur départemental), the taxpayer's observations, the taxpayer's second observations, a tax claim, referral to the court, etc.
Given the reassessments imposed by the tax authorities, it will be necessary to use every means available and fight relentlessly in order, at best, to win the case entirely or, at the very least, to obtain a limitation of the penalties.
