French Senate Proposes Taxing Unrealized Gains: New Challenges for Cryptocurrency Investors

1. Introduction

On November 16, 2024, the French Senate proposed an amendment (Amendment I-128) during the 2025 budget discussions, which 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. The amendment suggests taxing "non-productive capital gains," which specifically refers to the unrealized portion of value increases that exist only on paper. This includes the value increase of cryptocurrencies or other assets due to market price rises, but where these gains have not yet been converted into euros or other fiat currencies through actual transactions. In other words, when the market value of an asset rises but the holder has not yet sold it to convert it into cash, the unrealized gain is considered non-productive capital gain and subject to taxation. This article will explore the potential impact of this proposal on the cryptocurrency market by analyzing the current French tax system and the content of the new proposal.

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2. Background of the Amendment

2.1 Overview of French Tax System

2.1.1 French Real Estate Capital Gains Tax and Real Estate Wealth Tax

In France, under the current French Tax Code (Article 150U), capital gains from the transfer of real estate are subject to capital gains tax (Impôt sur la Plus-Value, CGT), with rates ranging from approximately 19% to 34.5%, depending on the holding period and other factors. The longer the holding period, the greater the tax relief, with exemptions available for holdings longer than 22 years. If the property is the primary residence, capital gains are exempt from tax. Additionally, social taxes must be paid, with rates and exemptions similar to those of CGT, but with a longer exemption period. The overall tax rate decreases as the holding period increases, reflecting the principle of tax fairness.

The Real Estate Wealth Tax (Impôt sur la Fortune Immobilière, IFI) is an annual tax levied on the net value of real estate assets held by individuals exceeding a specific wealth threshold. The tax applies to French residents' global real estate assets, while non-residents are only taxed on real estate located in France. The IFI tax rate is progressive, ranging from 0.5% to 1.5%, aimed at curbing real estate speculation and promoting market stability.

2.1.2 Cryptocurrency Taxation

France has a precedent for cryptocurrency taxation. In 2019, the country introduced taxation rules for digital assets under Article 150 VH bis of the General Tax Code. If a taxpayer resides in France and earns more than €305 in profit from the sale of Bitcoin or any other cryptocurrency within a year, they are required to pay tax. In 2023, France introduced a progressive tax system. Starting from the 2023 tax year (reported in 2024), taxpayers with annual income below €27,478 benefit from tax relief, with the highest tax rate reduced to 28.2%, compared to the usual rate of 30%.

Currently, capital gains from the sale of cryptocurrencies in France are taxed at a flat rate of 30%. Additionally, cryptocurrency-to-cryptocurrency transactions are not considered taxable events, which encourages investors to diversify their portfolios without incurring immediate tax burdens from frequent transactions.

2.2 Taxing Unrealized Cryptocurrency Gains

Under the current system, French investors only need to pay taxes when they sell digital assets and make a profit. However, under the proposed amendment, any increase in the value of crypto assets, even without a sale, would be taxed.

This proposed regulation comes at a time when countries around the world are actively discussing and implementing new regulations and tax rules for digital assets. Governments are exploring effective ways to integrate cryptocurrency into their tax systems, with varying strategies depending on local conditions. Some countries treat cryptocurrency like traditional investments for tax purposes, while others have created specialized tax rules for these emerging assets. For example, the Czech Republic, after unanimous parliamentary approval, has exempted Bitcoin held for more than three years from capital gains tax. Denmark's Tax Law Committee has recommended a 42% tax on unrealized capital gains from cryptocurrencies starting in 2026, which will apply to all cryptocurrency purchased since its inception, while allowing crypto investment losses to offset gains. In the United States, taxes are only levied when cryptocurrencies are sold for profit. Italy has raised its cryptocurrency capital gains tax from 26% to 42% to increase government revenue. Kenya announced that in the first half of 2023, it collected over $77 million in taxes from 384 cryptocurrency traders and plans to enhance its tax system and technological applications to improve tax efficiency.

In this context, the French Senate's proposal to tax unrealized cryptocurrency gains is not a sudden or isolated idea, but rather a necessary step in line with the global trend of developing and refining cryptocurrency tax and regulatory frameworks.

3. Core Content of the Amendment

3.1 Renaming and Expanding the Tax Base

The amendment proposes renaming the existing real estate wealth tax to the "non-productive wealth tax" and broadening the tax base beyond real estate to include undeveloped real estate, movable assets, financial assets, tangible assets, intellectual property, and digital assets, among others. This change aims to expand the scope of the wealth tax (IFI), making the tax system more in line with the needs of France's economic development. In addition to real estate, which was previously the only taxable asset, the new wealth tax will also include digital assets (such as cryptocurrencies) and liquid assets in bank accounts, as long as they are not used for economic activities. Furthermore, the amendment provides tax incentives for productive investments, such as building rental apartments or supporting small and medium-sized enterprises (SMEs).

3.2 Inclusion of Digital Assets

A notable aspect of the amendment is the explicit inclusion of digital assets in the tax base, with Bitcoin being used as an example. In Section 3 of the amendment, the text specifically states that digital assets will be subject to the non-productive wealth tax. More specifically, under the amendment to Article 965 of the General Tax Code, it is stated that the tax base for non-productive wealth tax will include assets held directly or indirectly by individuals and their minor children (in cases where they manage the children’s assets) on January 1 of the current year, falling into categories such as: "undeveloped real estate not used for economic activities… liquid assets and similar financial investments… tangible assets… digital assets (e.g., Bitcoin)..." This means that, legally, digital assets are explicitly classified as non-productive wealth and subject to the corresponding wealth tax. As such, cryptocurrencies like Bitcoin will now be taxed not only when they are transferred (capital gains tax on realized gains), but also annually based on their net market value on January 1 of each year. The net market value refers to the asset’s value after deducting related costs.

Regarding the effective date, the amendment stipulates that the non-productive wealth tax will replace the real estate wealth tax starting from 2025. This means that once the amendment is fully enacted, digital assets will officially be included in the non-productive wealth tax base starting in 2025. It is important to note that while digital assets are included under this tax, the amendment does not specify any particular threshold for taxation on digital assets. However, from the overall content of the amendment, it seems that increasing the threshold is a key reform direction, aimed at avoiding taxing families who may not be wealthy but are affected by inflation. Additionally, the amendment does not mention any exemptions for digital assets. Nevertheless, given that the purpose of the amendment is to encourage productive investments, the French government may consider offering tax exemptions or reductions for certain types of digital asset investments, which remains to be seen and discussed further.

4. Controversies Surrounding Unrealized Capital Gains Tax

In fact, there has been ongoing debate around whether unrealized capital gains should be taxed, with the central issue being whether taxing unrealized, potential gains rather than realized ones is fair or effective.

4.1 Advantages of Taxing Unrealized Capital Gains

One argument in favor of taxing unrealized gains is that it can increase tax revenue. For example, estimates by the Federal Reserve in the United States show that the wealthiest 1% of Americans hold more than 50% of all unrealized capital gains. A research team from the University of Pennsylvania further estimates that taxing these gains could raise as much as $500 billion over the next 10 years. In addition, there are three main benefits of taxing unrealized gains:

1. Addressing Tax Avoidance for High-Net-Worth Individuals: Many high-net-worth individuals avoid paying taxes because much of their wealth is tied up in assets such as stocks, bonds, real estate, and other investments. Some use a common tax avoidance strategy known as "buy, borrow, die," where they invest in appreciating assets, hold them for life, borrow against them to fund their lifestyle, and pass them on to heirs without selling. Even ordinary investors can indefinitely defer taxes by not selling assets, allowing them to accumulate large amounts of wealth without paying taxes.

2. Reducing Wealth Inequality: Taxing unrealized gains could help address wealth inequality by redistributing wealth through taxation, promoting social fairness.

3. Promoting Economic Efficiency: By taxing unrealized gains, investors may be incentivized to allocate capital to more productive sectors, improving overall economic efficiency.

4.2 Disadvantages of Taxing Unrealized Capital Gains

There are several disadvantages to taxing unrealized capital gains, which can be summarized in four key points:

1. Challenges in Asset Valuation: Accurately valuing assets, especially illiquid or less liquid ones, can be difficult because their market prices are not easily obtainable or frequently fluctuate. This results in a complex, time-consuming, and costly process of asset valuation.

2. Liquidity Issues: For individuals whose wealth is primarily tied to non-cash assets, being taxed on unrealized gains could create liquidity problems. They may be forced to sell assets or take on debt to fulfill their tax obligations.

3. Concerns Over Double Taxation: If an asset is taxed for its increase in value during the holding period and then taxed again when it is sold (realized gains), it could discourage long-term investments.

4. Potential Negative Economic Impact: Unrealized capital gains taxes could depress markets for illiquid assets, increase risk aversion among investors, reduce investment in high-growth or volatile assets, and potentially lead to capital flight to countries with more favorable tax regimes, weakening national competitiveness.

In short, implementing an unrealized capital gains tax faces challenges, including valuation difficulties, liquidity problems, the risk of double taxation, and potential negative economic consequences.

5. Impact on Cryptocurrency Holders and the Market

5.1 Impact on Cryptocurrency Holders

Many French cryptocurrency investors have expressed concerns about the fairness of the amendment. Unlike real estate or stocks, cryptocurrencies lack consistent valuation benchmarks and are often subject to high volatility. This policy may push investors to switch to stablecoins or use overseas exchanges to avoid heavy tax burdens.

5.1.1 Increased Tax Burden

Cryptocurrency holders will face a dual tax burden. On the one hand, they must pay taxes on realized gains when selling cryptocurrencies. On the other hand, they are required to pay an annual wealth tax based on the net market value of their cryptocurrency holdings. This significantly increases the actual cost of holding and trading cryptocurrencies.

5.1.2 Interference with Investment Behavior

The increased tax burden could lead cryptocurrency holders to adjust their investment strategies. Some long-term holders might opt to sell cryptocurrencies prematurely to avoid future tax pressure, while short-term investors may become more cautious, balancing returns with tax costs. Although proponents of unrealized capital gains tax argue that paper profits provide economic benefits to taxpayers and can thus be taxed "fairly," the reality for highly volatile assets like cryptocurrencies is different. Their prices can shift from gains to losses within days or even hours. In such cases, taxing unrealized gains could force investors to liquidate assets at unfavorable times, effectively incurring losses.

5.2 Impact on the Market

The increased tax burden could reduce the market liquidity of cryptocurrencies. Taxing unrealized gains imposes liquidity challenges on investors who have not yet sold their assets but face tax obligations. This is particularly concerning in the highly volatile cryptocurrency market, where asset values can fluctuate significantly. Investors might experience cash flow pressure near tax deadlines. If they lack sufficient cash to pay taxes, they may be forced to sell cryptocurrencies, tightening their financial situation and potentially causing market price volatility. Additionally, some investors may reduce trading frequency or exit the market altogether due to heavy tax burdens, leading to an overall decline in market liquidity.

5.3 Impact on the Market

The increased tax burden could reduce the market liquidity of cryptocurrencies. Taxing unrealized gains imposes liquidity challenges on investors who have not yet sold their assets but face tax obligations. This is particularly concerning in the highly volatile cryptocurrency market, where asset values can fluctuate significantly. Investors might experience cash flow pressure near tax deadlines. If they lack sufficient cash to pay taxes, they may be forced to sell cryptocurrencies, tightening their financial situation and potentially causing market price volatility. Additionally, some investors may reduce trading frequency or exit the market altogether due to heavy tax burdens, leading to an overall decline in market liquidity.

5.4 Global Impact

From a global perspective, France, as a key member of the European Union, often influences cryptocurrency policies across Europe and beyond. France's adjustment to its cryptocurrency tax policy may prompt other countries to reassess their tax frameworks. For example, the EU is currently developing a unified Markets in Crypto-Assets (MiCA) regulation. As MiCA provides a consensus framework for EU countries’ tax policies, France's amendment might encourage other EU nations or even the EU as a whole to consider similar tax policies. Furthermore, France's actions could influence other major economies, such as the United States and Japan, potentially altering the tax environment for global cryptocurrency investors.

6. Conclusion

As the cryptocurrency market matures, effective regulation and reasonable taxation have become common challenges for governments worldwide. Although this amendment is still in its early stages and has yet to become law, its underlying tax logic and policy orientation have already attracted significant attention from cryptocurrency holders and industry participants. Globally, capital gains are widely recognized as an important taxation target under income tax, whether or not countries impose standalone capital gains taxes. For instance, some jurisdictions (e.g., Singapore, Hong Kong) set a 0% capital gains tax to attract financial capital. In countries with non-zero rates, taxation generally occurs only upon "realization"—when paper gains are converted into actual profits. Most countries follow this approach for cryptocurrency capital gains, and even academic and policy researchers rarely propose taxing unrealized cryptocurrency gains. France’s tax amendment thus stands out as particularly "distinctive" and unique.

Despite its uniqueness, the amendment can be interpreted through two dimensions: its supporting measures and policy objectives. First, taxing unrealized cryptocurrency gains does not exist in isolation but aligns with mechanisms that offset cryptocurrency gains and losses. For example, the amendment proposes taxing "net gains" for unrealized capital gains. Second, the tax amendment aligns with France's broader trend of tightening cryptocurrency regulation in recent years. Cryptocurrencies' decentralized nature poses unprecedented challenges for tax collection. Taxing unrealized gains simplifies the taxation process for cryptocurrencies to some extent, becoming an important tool for governments to enhance intervention and oversight.

While the amendment may impose tax burdens on cryptocurrency holders, it also contributes to improving the tax system and promoting healthy market development. This underscores a global reconsideration of cryptocurrency taxation methods. As regulatory and taxation frameworks for cryptocurrencies continue to strengthen globally, we can anticipate a more standardized and transparent cryptocurrency market in the future.