Fri 12 Jul 2024 ▪
10
min of reading ▪ by
The legislative victory of the Nouveau Front Populaire (NFP) adds economic uncertainty. Indeed, the NFP program plans to abolish the 30% Flat Tax on capital gains in favor of income tax. This new taxation would heavily penalize large capital gains. However, according to preliminary studies, the State would lose tax revenue… Moreover, the number of cryptocurrency investors exceeds those in stocks. Capital gains taxation will be at the heart of the debate in the coming months.
The Nouveau Front Populaire Program: ISF, Flat Tax, IR, etc.
The victory of the Nouveau Front Populaire (NFP) could lead to a significant revision of cryptocurrency taxation. Specifically, the NFP proposes to abolish the 30% prélèvement forfaitaire unique (PFU). The introduction of the PFU in 2018 was notably a step towards simplifying the tax regime applicable to capital gains on digital assets. All capital gains on cryptocurrencies have thus far been taxed at the rate of 30%. But the NFP intends to tax these gains as labor income, following the 14 established tax brackets.
The Nouveau Front Populaire’s fiscal program mainly consists of the following points:
- « Increase the progressivity of income tax to 14 brackets
- Make the CSG progressive
- Reinstate a strengthened solidarity tax on wealth (ISF) with a climate component
- Abolish the flat tax and reinstate the exit tax
[…]
- Reform inheritance tax to make it more progressive by targeting the highest wealth and establish a maximum inheritance
[…]
- Make the fight against tax fraud and evasion a priority: allocate necessary human and financial resources, take initiatives in connection with any countries determined to fight this battle. »
Taxation: What the NFP Program Would Change
The abolition of the Flat Tax in favor of income taxation would impact:
- Reducing the tax on capital gains for low incomes and small capital gains.
- Increasing the tax on capital gains for high incomes and large capital gains.
It should also be noted that the income tax proposed by the NFP imposes taxes from the first euro earned, meaning it taxes the poorest. This is not the case with the current tax system.
The marginal tax rate, for example, stands at 30% from €34,000 in earnings. Beyond €34,000 in earnings, the “Flat Tax” on each new capital gain would therefore become more expensive than in the current system.
Additionally, cryptocurrencies are movable assets that would be included in the calculation of the wealth tax advocated by the NFP. This ISF would be reinforced by the “climate” cost.
Therefore, this new taxation could have two effects. On one hand, this reform would reduce the tax base, meaning the number of people who paid the 30% rate. On the other hand, this reform would significantly increase the tax rate on large portfolios and could even result in double taxation with the ISF.
Finally, we know that cryptocurrencies are often used by internationally mobile profiles. The reinstatement of the exit tax advocated by the NFP could indirectly benefit cryptocurrencies.
A Reform That Would Cost the State Dearly?
According to calculations by the Institut Montaigne, abolishing the Flat Tax would actually lose the State tax revenue! Indeed, the taxable base would shrink, and on average each taxpayer would pay less tax. The effect of abolishing the Flat Tax would actually be a cost to public finances. In other words, the NFP prefers to “tax the poor” or those not subject to the Flat Tax, to make the richest pay “more” on large capital gains… Such a reform would certainly benefit most current investors, but the biggest investors would be heavily affected.
« However, previous reforms have shown that the amount of dividends is highly sensitive to the tax rate. Abolishing the PFU, corresponding to an increase in the levy rate, would likely lead to a decrease in the taxable base, and thus lower revenues. Assuming that the taxable base returns to its 2017 level, i.e., before the PFU was introduced, the PFU abolition would result in a negative yield, generating a loss of €700 million. »
In a context of increased public finance deficit, it seems difficult to imagine implementing such a counterproductive measure. Moreover, the very relative majority context makes this measure a non-priority.
Current Taxation in France
To date, cryptocurrencies are considered as movables. They are subject to income tax when sold for fiat currencies (euros, dollars, etc.). Gains are taxed at a single flat rate (PFU), also called flat tax, of 30%. Furthermore, the flat tax includes 12.8% income tax and 17.2% social contributions.
Additionally, this tax regime primarily applies to individuals conducting occasional transactions. For professional traders or those whose trading activities are considered regular, gains are taxed at the progressive income tax scale, plus social contributions. With the NFP, these social contributions would become progressive.
Finally, movable assets, including cryptocurrencies, are not currently subject to the wealth tax. The current wealth tax only considers immovables. A reinstatement of the ISF by the NFP would lead to including cryptocurrencies in the taxable wealth of the French.
How Much Does the Flat Tax on Cryptocurrencies Yield?
In 2022, more than 20,000 people declared cryptocurrency gains, according to data provided by the Directorate General of Public Finance (DGFiP). These 20,000 French citizens declared nearly €400 million in capital gains. With the 30% flat tax, this represents nearly €120 million. Nevertheless, the number of declarants remains significantly lower than the number of cryptocurrency accounts.
Indeed, several surveys show that around 10% of French people own cryptocurrencies in 2023. Additionally, 85% of French people have already heard of cryptocurrencies. In other words, the number of French people owning stocks (less than 7%) is significantly lower than the number of people owning cryptocurrencies. This proportion would still be lower than in our European neighbors. Moreover, 26% of French people are considering investing in cryptocurrencies in the coming years. Nevertheless, French people invest less than 10% of their savings in cryptocurrencies.
A Considerable Shortfall?
Therefore, the issue of the Flat Tax is greater for cryptocurrencies than for stocks. But the share of tax returns remains very low on cryptocurrencies, and control means are very limited. In a rising cryptocurrency market context in 2024, the shortfall for the State could once again exceed one billion euros.
« With the 30% flat tax, the State should have collected €1.2 billion if the calculation method for this figure complies with the French tax code. There is a huge gap between the €43.5 million in taxes from our clients and this figure », notes Pierre Morizot, head of Waltio, a company specializing in taxation.
The absence of tax returns from the cryptocurrency community can be explained by:
- Generally low amounts invested on platforms.
- The “liberal” and anonymous nature of cryptocurrencies.
- The absence of withholding tax by Exchanges, as can be the case with stocks.
- The complexity of the tax system.
- The rather young public, not informed about tax issues.
Despite simplification efforts, cryptocurrency taxation remains indeed complex. Taxpayers must navigate between several forms and comply with rigorous reporting obligations, which can be a challenge for those unfamiliar with the technical aspects of taxation.
Conclusion
Ultimately, the relative majority obtained by the NFP could significantly transform cryptocurrency taxation. The NFP intends to abolish the Flat Tax and impose capital gains as labor income. Abolishing the 30% Prélèvement Forfaitaire Unique currently in force would have two major effects:
- An increase in the levy rate for large capital gains, especially when the investor’s income exceeds €30,000 per year.
- Reduction of the levy rate in the opposite case.
Furthermore, cryptocurrencies would be included in the movable wealth and subject to the ISF. But various calculations show that such a measure would result in a loss of revenue for the State by reducing the number of taxpayers subject to the previous rate.
Finally, almost all cryptocurrency investors do not declare their capital gains currently. Moreover, the shortfall for the State would exceed a billion euros… A considerable amount at a time when the number of cryptocurrency investors exceeds the number of stock investors.
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Author of various books, financial and economics editor for many websites, I have been forming a true passion for the analysis and study of markets and the economy.
DISCLAIMER
The views, thoughts, and opinions expressed in this article belong solely to the author, and should not be taken as investment advice. Do your own research before taking any investment decisions.
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