As Nigeria introduces tax on crypto gains, traders are skeptical

In a surprise move, the Nigerian government has introduced a new law that will create a tax on cryptocurrencies. Crypto traders say it might not work.

In 2021, the Central Bank of Nigeria banned cryptocurrency trading. Now, in 2023, on the eve of his resignation, the Buhari-led government, with its history of being averse to crypto, surprisingly introduced a new law to tax gains on digital assets such as cryptocurrency. The crypto tax comes from a number of changes in the Finance Act for 2022. According to the Finance Act, there is now a 10% tax on profits on digital assets.

Section 3(a) of the Capital Gains Tax Act is amended by inserting the expression “digital assets” after the word “debt” as follows: “Subject to exceptions provided in this Act, all forms of property shall be assets for the purpose. of this Act, whether situated in Nigeria or not, including options, debt, digital assets and intangible property generally.” According to Adewale Ajayi, a partner at KPMG, digital assets include cryptocurrencies, non-fungible tokens and other tokenized assets.

Although the change comes as a surprise to crypto traders, it has been in the works for a long time. Nigeria’s 2023 budget comes with a debt service cost of ₦6 trillion – 31% of the budget – and a budget deficit of ₦11.34 trillion – more than 5% of GDP. To remedy this, the government is looking for new sources of revenue, and with over $260 million worth of crypto transactions closed last year, a tax on crypto assets could come in handy.

“We woke up to see it on the news”

“How can you tax what you have not recognized or created a policy for?” a confused Obinna Iwuno told TechCabal. Iwuno is the president of the Stakeholders in Blockchain Technology Association of Nigeria (SiBAN), a body made up of private players in the Nigerian blockchain ecosystem and recognized as one of the stakeholders involved in the formulation of the national blockchain policy. “If you want to tax crypto,” he continued, “and it is good to do so because crypto generates economic activity that can contribute to the country’s GDP, you must first create a framework and gather stakeholders around a table for adequate policy-making. SiBAN knew nothing about this move from the beginning. Like everyone else, we woke up to seeing it on the news.”

Last month, when Nigeria announced it was introducing a national blockchain policy, most crypto enthusiasts didn’t budge. They generally cared less about the news, since crypto was still banned by the government. TechCabal then reported that the blockchain policy had lofty ambitions that excluded crypto. However, in a later conversation with one of the bill’s stakeholders, we learned that the government was ready to “adjust its strong stance against crypto”. It may now become clear how these adjustments will play out, especially with this latest move: a 10% capital gains tax on digital assets, including cryptocurrency.

How will the tax work?

Wale*, a crypto trader, told TechCabal that for the tax to work, the government needs to work with international exchanges and license crypto traders. “If the government wants me to pay a tax on crypto, they must legalize us and allow the exchanges to open offices in Nigeria. [The government] can’t take money from us if we get banned and I have to fly to Dubai or Singapore if I have problems with the exchanges, he said. Yesterday, Nigeria’s Securities and Exchange Commission instructed Binance Nigeria Limited to immediately stop soliciting Nigerian investors in any form.

According to an anonymous source at the Federal Inland Revenue Service, Nigeria’s tax authority, the plan to enforce the tax is still in the works and will be decided by the Joint Tax Board, as either FIRS or state agencies can enforce the tax. The Joint Tax Board was established in 1961 to ensure uniform standards and application of taxes in Nigeria.

Iwuno argued that while taxing crypto in itself is not a bad move, over-taxing it could bleed out an infant industry that is still taking shape. “The crypto industry in Nigeria is still a baby and overtaxing it or taxing it prematurely can kill it,” he said. Asked if the taxation could lend some form of legitimacy to crypto, Obinna said: “We can’t assume what they haven’t said. They have to come out clearly.”

Davizoe Effiong, CEO of BEI Consultancy, a Nigeria-based blockchain consultancy, told TechCabal that a tax on crypto profits would crash the adoption of cryptocurrency in the country. According to him, capping the tax surplus at 5% would not demotivate players (completely) and allow for the continued vertical trajectory of crypto adoption in the country.

“If the government wants to make money from crypto, it needs to step up and really get involved. One way to do this is by insuring the deposits of crypto exchanges – similar to how it is done for banks – so that crypto adopters can be assured of the safety of their funds. They can also support crypto operators with loans and generally expand the ecosystem by making it more attractive to international players,” Effiong said.

As is the practice of Nigerian government agencies, this action may take ages to be enforced – if ever. Nigeria’s new president, Bola Tinubu, promised an administration bullish on crypto and blockchain technology. It will be interesting to see how his administration responds to enforcing this action. However, a harsh reality remains: by law, any crypto trader or “hodler” will have to give the government a tenth of their earnings, even while the government’s ban on crypto remains.

*The name(s) have been changed to protect our sources