As a Luxembourg resident, individual and not having any activity in crypto-assets constituting a commercial activity, do I have to declare to the tax authorities that I hold bitcoins, cryptocurrencies or crypto assets?
Audrey Rouach-Baverel: There is no wealth tax, like in France, so you don't have to declare your assets. There is not even a form to do so.
What happens if I sell bitcoins for euros?
It's the same as when you sell cryptos for cryptos: it's an income generating event that triggers potential taxation. We will calculate the capital gain on the sale of bitcoins by estimating the difference between the sale price and the acquisition price.
There are many ways to acquire bitcoins and many individual buyers buy bitcoins either on a recurring basis or repeatedly depending on the price trend. It can be complicated, therefore, to establish this capital gain?
It's like when you buy assets over the counter, there's a shadowy side to it, because it doesn't necessarily go through a bank account. The taxpayer has to commit to being within the rules.
Can the tax authorities control this?
They can always control, of course. But you have to remember that if they have any doubts, the burden of proof lies with the taxpayer. It still has to be conclusive. It will be increasingly regulated. Regulation means reporting. This grey area will, de facto, be reduced.
In this case, if I want to reduce the capital gain, I can say that I sold the ones I acquired most recently, because the price is much lower than a year ago...
You will still have to be able to prove that you have sold this bitcoin and not another one. If you use a platform, this is not obvious, if not impossible. This applies to the capital gain, but also to the holding period.
We don't necessarily say it, but the length of time you hold these assets plays a role.
When you fall into the category of "miscellaneous" income, for non-real estate assets, the capital gain is exempt if you have been holding it for more than six months. You have to prove this to the administration and document it. In these cases, there is no need to calculate the capital gain, there is nothing to declare. In the event of an inspection, you have to be able to prove that you have held the shares for more than six months.
Even in the case of an off-platform wallet, there are encrypted keys, etc. If you think you've held bitcoins for at least six months, you don't have to declare anything. I guess the administration is more helpless, but maybe they have other ways to establish your bona fides. I have not had any complaints from my clients on this aspect.
What do I risk if the tax authorities do not accept my good faith?
Penalties and a determination of the taxable base by the administration, perhaps in an arbitrary manner since it has no elements. But I think that the administration is looking for consistency.
Do your answers on bitcoin apply to all 7,000 crypto-currencies? For both types of tokens?
The tax administration has not legislated as such on the activities of cryptos. I'm not going to talk about cryptocurrencies but about crypto-assets. It simply wanted to clarify certain points with two circulars, one on VAT and the other on direct taxes, in which it only addresses cryptocurrencies. This was in 2018, there were the beginnings of ICOs (a new kind of fundraising). It did not address crypto-assets, including utility tokens and security tokens. In the absence of precision, the main principles still apply: “Substance over form principle".
We will analyse the substance rather than the form. We will look at the criteria, how the security token is characterised, whether there is participation in the results, whether it is a fixed income. Based on this analysis, we will qualify it as equivalent to a bond or a share. The same goes for a utility token. What service does it entitle you to? And the same goes for other activities, whether it's mining, staking (the use of one's cryptos for rewards, editor's note).
During your conference for Lëtzblock with Petya Dimitrova, partner at Atoz, you mentioned some grey areas. Could you explain this to us?
There are plenty of grey areas! In everything related to mining, the administration assumes that the activity is, by nature, commercial. That might make sense when you're doing proof-of-work mining, but for proof-of-stake mining, you might wonder if it's not more like a return on existing assets. Is it really a commercial activity or should it not be classified as income from movable assets? When you mine, you get tokens. How is their value determined? Is there no price? This is an income-generating event in Luxembourg, on which you are taxed in Luxembourg, and then on resale (in the event of a capital gain).
The same goes for staking or airdrop--when you receive free tokens--how do you value them? The same goes for ICOs, which are not addressed at all in the circular. There is still a grey area with security and utility tokens and their tax treatment. And finally, perhaps, the stablecoin part. They are used more and more as a means of payment. Their rates are relatively stable because they are indexed to a fiat currency, so they are becoming more and more like a currency. Shouldn't it be considered a fiat currency?
We are starting to see possibilities to pay for a coffee or something with bitcoins. Should the bill for the coffee be included in their bitcoin tax return?
Yes, of course, this corresponds to the price of the service received in exchange for cryptocurrency. In this context, the capital gain (or loss) made on the cryptocurrency must be determined according to the rules mentioned above. A quick reminder of the main income-generating events: creating (mining) or airdrops or ICOs, when holding them and making a return (staking, "proof of work" mining) and when selling them either against another crypto, or against fiat, or against services or goods.
With experience, what would you recommend to a resident holding cryptos?
You have to keep good records of your cryptos with the dates of purchases and sales as well as the acquisition prices. The big difficulty is to find the holding period that corresponds to the cryptos sold. The circular specifies that one must be able to identify the entries and exits. When one is not able to individualise, the circular speaks of the weighted average cost valuation method. This does not inform about the method to be followed to determine the holding period.
I recommend my clients to have different accounts. One account to keep them for six months, so there is no misunderstanding, and another account on which we will "trade" and use the weighted average cost and determine the capital gains that are likely to be fully taxable. On large amounts, it deserves an analysis. I often encourage structuring, via an SPF for example, which I think is common sense, even if the structure is reserved for financial securities whereas the circular relates to crypto-currencies as intangible assets.
If one is mining, it is better to structure with a company. If you are buying and selling and you have returns from staking, it is also worth creating a company if the amounts are substantial. As soon as you have large volumes in relation to your overall assets, it is best to consult a tax expert.
This story was first published in French on Paperjam. It has been translated and edited for Delano.