UNDERSTAND EVERYTHING – How to declare capital gains in cryptocurrencies

With tax returns open since April 7th, BFM Crypto explains how to declare your capital gains from cryptocurrencies.

• I hold cryptocurrencies, what do I have to declare for tax purposes?

A taxpayer who opened an account on a foreign cryptocurrency exchange platform such as Coinbase or Binance must report that account to the tax authorities on Form 3916-BIS, even if their account is closed during the tax year. It doesn’t matter how much money he keeps on the platform. A user has to fill out as many forms as there are platforms they are on. He faces a fine of 750 euros per non-registered account.

On the other hand, if a user is a customer of a French platform like Coinhouse, they do not have to report it to the tax authorities. Likewise, there is an exception for decentralized platforms, which can be wallets (physical or virtual wallets used to store cryptocurrencies) such as Ledger or MetaMask.

“But that could potentially change with the European mica regulations. Also, decentralized platforms could have a KYC (for “Know Your Customer” or “know your customer,” a system for verifying a customer’s identity, ed.) and some additional standards, including account reporting,” said Adrian Felden, Business Manager at Waltio, a fintech specializing in cryptocurrency taxation.

• What must be declared for capital gains in cryptocurrencies?

If an investor makes a taxable sale, he must claim it for tax purposes. Among taxable transfers, we distinguish transfers of cryptocurrencies against fiat currency (legal currencies such as euros or dollars) or the purchase of a good or service with a cryptocurrency.

A tax exemption applies if all taxable sales for the whole year are less than 305 euros in capital gains. This also applies to capital losses: If a user has lost money when selling Bitcoin, this must also be declared.

• How do I declare capital gains?

Cryptocurrencies fall within the scope of the 30 percent flat tax (the unified flat levy or PFU with 17.2 percent social security contributions plus 12.8 percent income tax) of the Pact Act, with a special regime for digital assets. In order to know how to report their capital gains, a user must track all cryptocurrency transactions made during the reporting year and be able to calculate the valuation of their portfolio or portfolios upon taxable disposal.

Here is the calculation formula that applies to any taxable disposal:
selling price – [prix total d’acquisition × (prix de cession / valeur globale du portefeuille)]

Example proposed by Adrian Felden: On January 1st, a taxpayer buys 1000 euros bitcoin and 600 euros ether (i.e. a total of 1600 euros). After a price increase in February, his bitcoin wallet is worth 2100 euros and 900 euros for ether. The total value of the taxpayer’s portfolio is therefore 3000 euros (2100 + 900 euros).

After this increase, the taxpayer decides to sell 600 euros of ether (this amount thus represents the selling price).

To calculate the taxable capital gain, the ratio between the total purchase price of the customer’s inventory of digital assets at the time of transfer and the ratio of the transfer price of these digital assets to the total value of the taxpayer’s portfolio at the time of transfer must be deducted from this total.

The quantity sold corresponds to 20% of the portfolio (600 / 3000 x 100 = 20%). Then, from the sale price, the sum of 20% of the initial value of the taxpayer’s portfolio must be deducted, i.e. 20% of 1600 euros (the amount initially invested), which equals 320 euros (1600 x 20% = 320). With a transfer price of 600 euros, the taxpayer’s taxable capital gain is 280 euros (600 – 320). With a PFU of 30%, he has to pay 96 euros (320 euros x 30% = 96 euros) to the tax office.

• What if I own stablecoins?

Stablecoins – these cryptocurrencies backed by classic fiat currencies such as euros or dollars – allow you to stay in the market for a long time without being exposed to capital gains. If a user has made capital gains by selling bitcoin for stablecoins, they are not taxable. On the other hand, if he sells stablecoins against the euro, he needs to know the valuation of his portfolio at the time of the transaction, the value of which will have increased in the previous months.

“This neutralization of taxation of crypto-to-crypto transfers may explain the fact that, unlike other tax systems in the financial world, it does not have the right to carry forward its capital losses from year to year,” specifies Adrian Felden.

• What if I have NFTs?

There is legal uncertainty regarding capital gains made on NFTs (non-fungible tokens). So far, NFTs are not considered digital assets. They do not fit this definition, which would mean that NFTs could soon have their own taxation. A customer can buy an NFT at an initial price that can quickly increase tenfold after the purchase: when they sell their NFT, they can charge the flat tax according to the applicable digital asset regulations, unless there is a specific rule. It is possible that there will be a special regulation for NFTs in the next few months.

• Is the existing system adapted to the cryptocurrency ecosystem?

“The calculation method, which consists in tracking the valuation of the portfolios at each taxable transfer, is complex. Especially since the prices can differ from platform to platform and the usages and different applications of the crypto ecosystem change very quickly,” says Adrian fields.

We got it well: for a person who wants to keep their accounts in an Excel file, it remains almost impossible. The latter need to seek help from experts, be they lawyers, tax specialists or even companies specializing in cryptocurrency taxation.

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