Origins and taxation of cryptocurrencies

Cryptocurrencies have seen tremendous growth in recent years, attracting the attention of many investors and users. However, their use raises complex questions regarding taxation of cryptocurrencies. Governments around the world are seeking to understand how to regulate and tax cryptocurrencies, while investors need to understand how to report their cryptocurrency transactions to tax authorities.

In this article, we will explore the history of the genesis of cryptocurrencies and their current tax regulations. We will discuss the different tax aspects of cryptocurrencies, including how they are taxed, reporting rules and the tax obligations of investors.

Whether you are an investor or simply curious to understand the taxation of cryptocurrencies, this article will provide you with an overview of current issues. Let's go !!

???? Genesis of crypto currencies

A lot has happened since the origin of cryptocurrencies. Beyond what many people think, the development of cryptocurrencies has come a long way.

Scientists, mathematicians and people with great vision for the future have made great contributions that have played a decisive role in making these new crypto assets or digital currencies what they are today.

Besides Satoshi Nakamoto, creator of Bitcoin, we find other names like David Chaum and Wei dai, which can be considered the precursors of cryptocurrencies.

David Chaum

As already stated, the history of cryptocurrencies as we know them dates back to 2008. However, its real roots go back years, to the 1980s. Specifically in 1983, when the American cryptographer David Chaum developed an early cryptographic system called eCash.

It was designed as a kind of anonymous cryptographic electronic money or electronic payment system. And it was used as a micropayment system in a US bank in 1995 to 1998.

This software is responsible for storing sums of money in a digital format cryptographically signed by the bank. The user can spend this digital money at any merchant who accepts eCash, without having to open an account with the supplier or transmit credit card numbers.

The security of this system was based on public key digital signatures. In 1995, he developed a new system called DigiCash, which used cryptography to keep the data of those carrying out economic transactions confidential. In fact, you could say that this is how cryptocurrencies were born.

Wei Dai

Later in 1998, Wei Dai, a computer engineer specializing in cryptography, published an essay in which he introduced the concept of " b money », an anonymous distributed electronic payment system. In it, Dai describes the basic feature set inherent in all cryptocurrency systems in existence today.

In his essay on “b-money”, Dai includes a series of particular and specific characteristics that are present today as a fundamental element of the cryptocurrencies circulating today.

One of its main features was the need for community verification in a collective ledger of the computational work needed and which would facilitate the generation of cryptocurrency. In addition to the corresponding reward to those who were in charge of carrying out this work.

B-money, the initial test

Urban artist Dai specifies in his essay that it is essential to maintain collective accounting with cryptographic protocols, which would be responsible for authenticating transactions and, at the same time, would serve as a guarantee that they would remain organized.

With this proposal, Dai goes ahead and takes the first steps on the way to what we know today as Blockchain technology. It also suggests implementing the use of public keys or digital signatures for the execution of smart contracts and transaction authentication.

In addition to all of the above, the essay ” b money ” de Dai made two proposals. The first considered a function Proof of Work PoW to generate "b-money", which is considered very impractical.

And the second something more similar to the block structure we currently know. Although " b money never became official, Dai's work has been widely recognized. So much so that the smallest unit of Ethereum is called “WEI" in his honour.

Satoshi Nakamoto and Bitcoin

10 years later, in 2008, during the great global financial crisis, a person or group of people whose true identity is still unknown came forward under the pseudonym Satoshi Nakamoto.

Nakamoto on November 1 published a white paper of what he called Bitcoin on the foundation's website P2P (Peer-to-Peer). In " Bitcoin: A Peer-to-Peer Electronic Cash System » il unveiled its new vision of electronic money.

In this way, the concept of Bitcoin is introduced to the world for the first time and this is how cryptocurrencies are born. Later, on January 3, 2009, its official birth occurs when the first Bitcoin appears as part of the first block of 50 BTC called "Genesis».

Bitcoin, the first famous crypto

This peer-to-peer transmission format indicates that it is a system of decentralized payment. Which means that, unlike other traditional currencies of legal circulation called fiat money, Bitcoin does not have a centralized issuer, but is generated by calculations based on specific algorithms of the network nodes.

In this way, it can circulate anywhere in the world, be in any connected computer and anyone can participate in its manufacture or " its mining ».

No matter where you are, anyone can mine, buy, sell or receive Bitcoins. Using a distributed database composed of nodes across the P2P network.

The offer is growing

After the launch of Bitcoin, whose initial goal was to become a digital currency with which purchases could be made online, the market for cryptoassets or digital currencies began to develop very quickly.

This market has spawned many other cryptocurrencies, although not all of them have been successful. Some of them are:

• 2011 : Litecoin (LTC) and Namecoin (NMC).
• In 2012: Ripple (XRP) and Peercoin (PPC).
• 2013: Dogecoin (DOGE).
• 2014: MaidSafeCoin (MAID), Dash (DASH), Monero (XMR), BitShares (BTS), SolarCoin (SLR).
• In 2015: Ether (ETH).

🌿 Cryptocurrency Market Trends

Cryptocurrencies are experiencing growing adoption across the world. More and more individuals, businesses and financial institutions are recognizing their value and integrating them into their activities. For example, some companies accept payments in cryptocurrencies, which contributes to their widespread adoption.

Governments and regulators are seeking to establish regulatory frameworks for cryptocurrencies. This aims to protect investors, prevent fraud and money laundering, as well as ensure financial stability. Regulations can vary from one country to another, which may impact investor confidence and the value of cryptocurrencies.

Blockchain technology, which underpins cryptocurrencies, is increasingly used in various sectors. Companies are using blockchain to improve product traceability, financial services are leveraging the technology for faster and more secure transactions, and even the healthcare industry is exploring potential applications of blockchain. The growing integration of blockchain is driving the adoption of cryptocurrencies.

In addition to well-established cryptocurrencies such as Bitcoin and Ethereum, new cryptocurrencies are emerging regularly. These new cryptocurrencies may offer unique features or solve specific problems. Some of these are quickly gaining popularity and can present attractive investment opportunities.

The cryptocurrency market is known for its volatility. Cryptocurrency prices can fluctuate significantly in a short period of time. This volatility can be attributed to various factors such as market news, government regulations, technological developments and investor sentiments. Investors should be prepared for these price fluctuations and take a cautious approach.

🌿 Taxation applicable to cryptocurrency trading

Cryptocurrency trading consists of frequently buying and selling cryptocurrencies (Bitcoin, Ethereum, etc.) with the aim of making short-term capital gains. The gains generated by these transactions are subject to tax in France.

🎯The rules for individuals

In France, capital gains realized by individuals on the trading of cryptocurrencies are subject to the Levy Single lump sum (PFU) of 30%, including 17,2% for income tax and 12,8% for social contributions.

Concretely, if you buy a bitcoin at €30 and resell it at €000 a few months later, you realize a capital gain of €10 taxed at 000%. Attention, these rules apply from the 1st euro of transfer, there is no deductible.

Any capital losses may however be set off to offset future capital gains.

🎯Taxation for trading professionals

If your cryptocurrency trading activity is professional, then your taxation will be different. The profits generated will be qualified as Non-Commercial Profits (BNC) and not as capital gains.

Therefore, they are subject to income tax according to the progressive scale, then to social security contributions of 17,2%. Depending on the amount of your annual profits, you even potentially fall into the maximum bracket of the IR at 45%.

The change in tax regime may therefore cost a lot ! The qualification of professional activity is done on a case-by-case basis according to different criteria. Be careful if you trade intensively.

🎯 Taxation in other countries

Each country defines its own taxation of cryptocurrencies.

A brief overview: in the UK, capital gains are exempt from tax if you are not trading professionally. In Germany, the flat tax also applies at the rate of 25%. In the United States, the rate varies between 0 and 20% depending on the length of detention. For professional traders, it goes up to 37% !

In Switzerland, crypto trading is considered a commercial activity. Normal income tax applies. In Belgium, taxation depends on the status of the trader (individual or professional) and the currency used for the purchase.

In Africa, this tax is still non-existent. In short, strong disparities exist. But overall, most countries have chosen to tax capital gains in cryptocurrencies.

🌿 Taxation on cryptocurrency mining

Cryptocurrency mining refers to the computer process of verifying and validating transactions on the blockchain of a decentralized cryptocurrency such as Bitcoin or Ethereum. Learn more about crypto mining

🎯 Tax regime for mining in France

In France, the cryptocurrencies received as a reward for mining constitute a taxable gain. If you mine occasionally and irregularly as an individual, they are subject to the PFU of 30%.

On the other hand, for an intensive mining activity comparable to a professional activity, cryptos are imposed in the BNC category. The profits made are calculated by subtracting the costs related to mining (electricity, equipment, etc.) from the valuation of the cryptos received.

This valuation is done during the day of receipt of the mined cryptos.

🎯 Tax optimization of mining

Fortunately, it is possible to optimize taxation on your mining activity. By creating an SAS (joint stock company), you benefit from a reduced tax on profits.

You can also choose to keep your mined cryptos without selling them: as long as there is no sale, there is no tax. Obviously, this assumes having enough cash to pay the mining fees without relying on the sale of the cryptos generated.

By properly structuring your activity, you can therefore limit the tax impact of mining.

🎯 Special case of Bitcoin mining

Bitcoin mining deserves special focus for two reasons: the technical difficulty and the transition to “Proof of Stake“. On the one hand, mining BTC requires very expensive specialized ASIC type equipment. Individuals are excluded.

Only highly capitalized companies still manage to do so. On the other hand, Bitcoin must pass during 2023 from “Proof of Work” to “Proof of Stake”, a much less energy-consuming mechanism no longer requiring “mining” strictly speaking.

These technical developments will further complicate the already unclear taxation of BTC mining. Professional mines may have to adapt. For the individual, Bitcoin mining seems complicated to consider in the near future, except to opt for alternative cryptos.

🌿 The taxation of passive income from cryptocurrencies

🎯 Taxation of interest and staking

Some crypto-assets generate so-called “passive” income. This is especially the case with thestaking”: you immobilize your cryptos to validate transactions and receive a reward.

This income is similar for tax purposes to interest or dividends and taxed as a levy. single lump sum of 30% in France.

The same applies to interest received on crypto savings accounts. In short, no derogatory regime: these revenues pass through the PFU mincer. It remains possible to optimize via original legal constructions: rental of tokens, loans… But guaranteed complexity.

🎯 Special case of airdrops

What about the taxation ofairdrops”? These free distributions of cryptocurrencies generally result from a fork of a blockchain protocol. According to Bercy, airdrops constitute a free acquisition and are therefore exempt from income tax.

Only social security contributions are due at the time of the transfer of the cryptos received. But beware of misinterpretations. This doctrine applies only to “real” airdrops from a fork. Distributions with consideration are analyzed differently. As often in taxation, the devil is in the details!

🌿Taxation applicable to Non Fungible Token

🎯 Tax regime on purchase and resale

The Not Fungible Token constitute a tax headache insofar as they have a hybrid legal nature between digital assets and intangible assets. Purchase, VAT does not necessarily apply if the seller is an individual.

Registration fees are also not clear. On resale, Bercy considers that individuals must submit the capital gain to the 30% flat tax, while professionals fall under their usual taxable profit.

But some defend the qualification “ofwork of art” to evade taxes! Confusing situation...

🎯 Possible tax optimizations

Fortunately, there are optimizations to lighten the tax note on NFTs:

• Conservation of the NFT for at least 22 years to benefit from the exemption of works of art.
• NFT Donation to a relative to avoid inheritance tax.
• Buy dedicated equipment (PC gaming, VR, etc.) and amortize tax over several years.
• Resell NFT occasionally as an individual for pay 30% instead of corporation tax.
• Convert its cryptocurrencies into NFT to reset the 22-year period before transfer.

Well optimized, NFT taxation can be controlled. But the legal vagueness remains on this unidentified asset!

🌿 The taxation of cryptocurrency fundraising

🎯 ICOs, IPOs, STOs, IEOs

Fundraising in cryptocurrencies has multiplied in recent years, whether it is ICO (Initial Coin Offerings), IPO (Initial Public Offering), STO (Security Token Offering) or IEO (Initial Exchange Offering).

Behind this soup of acronyms hide different realities, but all involve specific tax obligations. Mainly carried out by blockchain startups, these operations make it possible to raise capital in exchange for crypto-assets.

Taxation will depend on the exact legal status of these famous “Tokens".

🎯 Taxation of companies raising funds

From the point of view of the company initiating a fundraiser in cryptocurrencies, whether French or foreign, the receipt and custody of cryptocurrencies is not taxable in itself in France.

On the other hand, as soon as the tokens are transferred or used, they must be valued at their market value. This valuation will generate a taxable profit at the common corporate law rate.

In addition, the issuer must pay VAT on all funds raised, whether in fiat currency or in cryptocurrencies. Finally, be careful, if token holders benefit from specific rights, this could change the tax situation…

🎯 Taxation of contributors/investors

On the side of investors or individual contributors participating in a fundraiser in cryptocurrencies, taxation once again depends on the precise legal nature of the assets received:

• For simple cryptocurrencies without special rights: no taxation on subscription, only on future transfers (PFU of 30%).
• For tokens similar to securities: potential taxation of gains under the PVMOB or BIC/ISF regime.
• Equity securities: subject to real estate wealth tax.
• For security tokens: possible taxation of the financial income produced.

In short, a case-by-case analysis is necessary to determine the right tax regime. Professional investors are generally taxed at BIC or BNC. Once again, maximum complexity on this subject!

🌿 Optimize your cryptocurrency taxation

Taxation should not be an obstacle to your investments in cryptocurrencies. Let’s now look at the main techniques available to you to optimize your taxation.

🎯 Choice of tax status

A first possibility is to choose carefully your tax status based on your level of activity. Individuals are subject to the 30% PFU, while professionals are subject to IR/IS. But between the two, a gray area exists.

You can by example create an SAS (simplified joint-stock company) to benefit from a reduced rate on profits. Or opt for the micro-enterprise scheme. Structure your crypto business to optimize your taxation.

🎯 Declare your cryptocurrencies

Another imperative: declare your cryptocurrencies exhaustively in your tax return. Some tend to omit them, thinking that the tax authorities will see nothing but fire. Error ! With the tax regularization of cryptos in France, the tax authorities have the tools to track you down.

Declare your gains, losses, trades, airdrops... precisely. This will avoid painful straightenings.

Conclusion

The genesis of cryptocurrencies has opened up new financial perspectives, but also raised challenges in terms of taxation. As these digital currencies continue to grow in popularity, it is essential to understand the tax implications surrounding them.

Tax regulations for cryptocurrencies vary from country to country, and it is important for investors to familiarize themselves with the specific laws and rules in their jurisdiction. Properly reporting cryptocurrency transactions and paying appropriate taxes is essential to complying with tax obligations and avoid possible sanctions.

It is also essential to stay informed of regulatory developments in the field of cryptocurrencies. Governments are seeking to better understand these digital assets and adapt their tax regulations accordingly. Investors and users should therefore remain vigilant and stay abreast of potential changes in the cryptocurrency tax landscape.