Crypto, NFTs tax signals Kenya’s softening stance

Kenya’s plan to introduce a three percent tax on cryptocurrencies such as bitcoins and non-fungible tokens (NFTs) has sparked mixed reactions.

While some financial analysts argue that the tax on the transfer of digital assets could stifle the nascent industry, crypto experts say that in treating these investments as property for tax purposes, Kenya is finally recognising them, hence arousing investors’ interests.

“Taxation is a clear recognition of this asset class. Taxation is welcome, crypto investment is not a means to run away from tax but rather an advanced form of exchange. Essential governance will, therefore, create greater accessibility, transparency, and growth,” says Avhit Bij, a blockchain and crypto expert.

Globally, there has been a strong appetite for new rules to shape the future of the industry and tighten the grip on investors.

“Africa too can become a hub for blockchain and crypto if it creates favourable systems. The likes of El Salvador are making bitcoins legal tender, and Belgium and Iceland are having high tax brackets on gains. Tax-friendly countries with supportive regulations in the crypto space are seen to have a broader outlook on the future of this asset,” says Mr Bij.

Benjamin Arunda, a blockchain expert, says the tax may actually increase awareness of digital assets investments. Over the years, more Kenyans have been drawn to digital asset investments.

According to the Knight Frank wealth report 2022, six percent of Kenya’s dollar millionaires now own an NFT, while 13 percent have invested in a cryptocurrency.

Wealthy Kenyans are also seeking second homes in countries with better investment options such as St Kitts and Nevis, which are crypto-friendly, hence attractive to technology investors and entrepreneurs.

“Therefore, much of it relies on the investor to accurately report crypto returns as most crypto transactions are semi-anonymous. However, I think the government should come up with a legal framework to regulate crypto activities before seeking to tax it,” Mr Arunda says.

Ronny Chokaa, an analyst at investment firm Genghis Capital, argues that the tax proposal may suppress growth.

“The tax might stifle the sector’s growth which has been on the rise as an alternative to contemporary financial instruments. There is also a possibility that the trading of digital assets will now go incognito,” he says, adding that the tax proposal came as a surprise as it originates from a government that is yet to pronounce itself adequately on its position on digital assets.

Read: Bill sets up KRA tax dragnet for 4m cryptocurrency users

The Central Bank of Kenya (CBK) has distanced itself from cryptocurrency trading, pointing to the risks involved in such dealings.

“There are people who are excited about cryptocurrencies because they see it as a sort of investment that can win big because prices are going up quickly, so they believe they would see a huge return for their investment,” CBK Governor Patrick Njoroge said in March last year.

The CBK previously issued circulars to banks warning them against dealing with cryptocurrencies or transacting with firms dealing with assets.

Nevertheless, the CBK seems to be softening its stance as it mulls the creation of a Central Bank Digital Currency (CBDC).

“A CBDC would make the financial system safer by allowing individuals, private sector companies, and non-bank financial institutions to settle directly in central bank money, rather than bank deposits,” the CBK stated in February last year.

Mr Bij says Nigeria and Ghana have also joined the CBDC bandwagon to trace the flow of money into the digital asset space.

Tax challenges

But as countries become aggressive in their efforts to make sure investors pay the tax due on digital assets, there might be challenges in calculating gains if investors are using trading bots that perform thousands of trades daily, or investors will be relying on their exchanges to get the records.

“A basic taxation structure with a simple tax rate cannot be applied in a general context,” Mr Bij says.

“It requires an understanding of how crypto is stored and traded. Among the many factors that need to be considered are the depositing and withdrawals of funds, Fiat [a government-issued currency that is not backed by a physical commodity such as gold or silver] is most realised and where the fiscal policy is given the most importance. However, taxation on ‘real money’ gains is purely the focus for now,” he says.

He adds that to navigate some of the challenges, one needs to simply look at the bottom line of the trading bots at the end of the year.

“Whether the gain has come from human traders or bots, a gain is a gain,” he says.

Cryptocurrencies are also used as a medium of exchange for goods and services and not just as an investment asset as part of a portfolio. Digital assets cover cryptocurrencies such as bitcoins, stable coins, alternative coins, and NFTs.


Considering this, experts argue, using both direct and indirect tax would be more effective.

“Clarity on the way the tax is calculated will make the system more effective,” says the blockchain and crypto expert.

Low-tax havens

While no official data exists on digital assets in Kenya, private research and surveys have uncovered a bubbling industry in the country.

A report by the United Nations Conference on Trade and Development published in July last year showed 4.25 million Kenyans owned cryptocurrencies.

The report placed Kenya ahead of developed countries such as the US whose share of population owning the digital assets stood at 8.3 percent.

Low fees charged by crypto exchanges, speed in remittances, and Internet access were factors attributed to a rise in the adoption of digital assets in Kenya.

So can taxation be counterproductive if Kenyans opt to invest in low-tax countries? In some developed countries, capital gains tax on cryptocurrencies can be as high as 37 percent.

But long-term holders are avoiding tax altogether on digital assets by investing in low-tax havens in the Caribbean island.

However, Mr Bij says various trading blocs are looking at harmonising policies to avoid a situation where investors shift and coordinate how they hold their assets.

“A 3.0 percent tax rate seems fair and manageable at this stage but the policymakers must avoid shifting their position which could result in investors re-thinking their stance,” he says.

“The best way to deal with cryptocurrency is to welcome it and have a tax level which makes investors want to be transparent, and pay their due tax on gains. A fair tax system will retain existing investors and at the same time attract a much-needed influx.”

Source; Business Daily

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