With the recent development of cryptocurrencies and virtual currencies, it is becoming increasingly common for gifts or bequests to partially or wholly consist of bitcoin or other cryptocurrencies, such as ethereum, litecoin, ripple, or dash.
Following the death of the grantor, recipients may find it difficult to recover cryptocurrency assets unless the deceased provided instructions on how to access their cryptocurrency accounts. Recipients who reside in France should determine their potential gift and inheritance tax exposure before accepting any gift or bequest from a US tax resident.
Preliminary observation: To enjoy a gift or bequest in cryptocurrencies, the recipient must be able to justify the origin of their virtual portfolio. Recipients of cryptocurrencies might be tempted to recover their gift or bequest in the anonymity of the blockchain to avoid gift and inheritance taxation.
It must be made clear to such recipients that in doing so, they will be forced to maintain such assets in the form of cryptocurrencies. If there is any attempt to convert such assets to dollars, euros, or other real assets, their bank will require proof of the origin of the converted assets before accepting such a deposit.
Recipients of cryptocurrencies should therefore always properly declare such currencies with the competent tax authorities and recognize their potential liability for inheritance or gift tax.
According to French tax law, cryptocurrencies are unquestionably taxable estate assets. In 2014, the French tax authorities specified in their official doctrine (BOI-ENR-DMTG-10-10-20-10 n°10, 11-7-2014) that virtual units of account stored on an electronic medium—such as bitcoin—were part of the taxable estate of the deceased.
As such, gifts or bequests of cryptocurrencies by a US tax resident to a French tax resident must, under French tax law, be declared to the French tax authorities and subject to inheritance and gift tax in France.
However, due to territorial rules, not all cryptocurrencies’ gifts and bequests are subject to inheritance and gift tax in France. According to territorial rules provided by French tax law (Article 750 ter of the French General Tax Code), a cryptocurrency account is subject to inheritance or gift tax in France:
- because the deceased or donor was domiciled in France, or
- if the deceased or donor was domiciled outside France, because the heir or donee was domiciled in France for at least six out of the 10 years preceding the date of death or gift or, failing that, because the cryptocurrency account is held in France.
Based on the French territorial rules, gifts or bequests of cryptocurrencies by a US tax resident to a French tax resident are subject to French inheritance or gift tax if:
- the recipient resided in France for more than six years (continuous or not) during the 10 years preceding the death or gift, or
- the cryptocurrencies are held in France.
However, based on the combined provisions of the domestic tax law of the US and France—as well as the tax treaty between the US and France dated Nov. 24, 1978, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on estates, inheritances, and gifts (the France-US Tax Treaty)—gifts or bequests of cryptocurrencies from a US tax resident to a French tax resident could potentially be free from any gift and estate tax whether or not family ties exist between the deceased or donor and the recipient.
Gifts and bequests qualify as taxable transactions under IRC Section 2502(a) whether they consist of real estate, cash, shares, or cryptocurrencies and are therefore potentially subject to a US gift or inheritance tax equal to 40% of the value of the succession or gift.
However, Section 2505 provides that any person having a tax residence in the US may transfer wealth, by gift or bequest, free from gift or inheritance tax within the limit of an amount determined by law. This amount, which stands at $12.06 million for each US tax resident, can be used for any transfer of wealth made during their lifetime (gift) or by death (succession).
To benefit from this tax exemption, each gift from a US tax resident during their lifetime or as a result of death must be declared regardless of whether the recipients are family members. As long as the $12.06 million threshold for 2022 is not reached, no gift and inheritance tax is due in the US. The good news is that this threshold applies not only to gifts and succession between US tax residents but also to gifts and succession from a US tax resident to a French tax resident.
Indeed, article 8 of the France-US Tax Treaty provides that: “Except as provided in Articles 5, 6, and 7, property, including shares or stock in a corporation, debt obligations (whether or not there is written evidence thereof), other intangible property, and currency may be taxed by a Contracting State only if the decedent or donor was a citizen of or was domiciled in that State at the time of death or the making of a gift, and if taxable by that State under its laws.”
Articles 5, 6, and 7 of the France-US Tax Treaty respectively refer to real estate assets, assets used by a permanent establishment and tangible assets. Therefore, the right to tax a gift or bequest of other assets such as cryptocurrencies to a French tax resident is allocated to the US if:
- the donor is a US tax resident, and
- the gift or bequest constitutes a taxable transaction under US law even if no US gift or inheritance tax is paid due to a specific allowance, exclusion, credit, or deduction.
Article 12(6) of the France-US Tax Treaty provides that: “If under this Convention any property would be taxable only in one Contracting State and tax, though chargeable, is not paid (otherwise than as a result of a specific exemption, deduction, exclusion, credit, or allowance) in that State, tax may be imposed by reference to that property in the other Contracting State notwithstanding any other provision to the contrary.”
By applying the US tax code—pursuant to which gifts and bequests constitute taxable transactions but provide US tax resident donors an individual exemption up to $12.06 million—combined with Articles 8 and 12(6) of the France-US Tax Treaty, gifts or bequests of cryptocurrencies granted by a US tax resident to a French tax resident are not subject to any gift and inheritance tax in the US or France if the deceased or donor has not reached his $12.06 million threshold.
Though favorable, this conclusion is questionable for gifts because the person liable to pay the gift tax is not the same under the tax law of the US, which taxes the donor, or under French tax law, which taxes the donee. But in the context of individual tax rulings, the French tax authorities have confirmed that gifts of securities or cash from a US tax resident to a French tax resident were not subject to any gift tax in France because such gifts were taxable in the US, even if no gift tax is actually paid in the US.
Consistency would require that the same reasoning should apply to gift and bequests of cryptocurrencies, but these tax rulings apply only to the facts presented in the individual cases on which they were made. They are not binding with regard to any other present or future cases. It is therefore strongly advised to file a nominative demand for a tax ruling with the French tax authorities on the assumption that the French tax resident recipient of a cryptocurrency portfolio from a US tax resident will not be taxed for an amount up to the $ 12.06 million threshold.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Claire Guionnet-Moalic is a tax partner at Orsay Avocats Associés and specializes in tax law. She represents French and international clients regarding all aspects of taxation related to capital investments, mergers, acquisitions, reorganizations, trans-border transactions, and all other financial operations.
We’d love to hear your smart, original take: Write for Us