Crypto, NFT’s tax signals Kenya’s softer stance

Kenya’s plan to impose a three percent tax on cryptocurrencies such as bitcoins and non-fungible tokens (NFTs) has sparked mixed reactions. FILE PHOTO | SHUTTER STOCK

Kenya’s plan to impose 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 by treating these investments as property for tax purposes, Kenya is finally recognizing them, thereby piquing investors’ interest.

“Taxation is a clear recognition of this asset class. Taxation is welcome, crypto investing is not a means of tax evasion, 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.

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

Benjamin Arunda, a blockchain expert, says the tax could actually raise awareness of investments in digital assets. Over the years, more Kenyans have been attracted to digital asset investments.

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

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

“Therefore, a lot of it depends on the investor reporting accurate 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 they try to tax it,” Arunda said.

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

– The tax could stifle the sector’s growth, which has been on the rise as an alternative to modern financial instruments. There is also a possibility that trading in digital assets will now go incognito, he says, adding that the tax proposal came as a surprise as it comes from a government that has not yet spoken sufficiently about its stance on digital assets.

Read: Bill sets up KRA tax deduction net for 4 million cryptocurrency users

The Central Bank of Kenya (CBK) has distanced itself from cryptocurrency trading, pointing to the risks associated with such trades.

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

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

Nonetheless, the CBK appears to be softening its stance as it considers the creation of a central bank digital currency (CBDC).

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

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

Fiscal challenges

However, as countries become aggressive in their efforts to ensure that investors pay the tax on digital assets, there may be challenges in calculating gains if investors use trading robots that execute thousands of trades daily, or investors will rely on their exchanges to get the records.

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

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

He adds that to navigate some of the challenges, one simply has to look at the bottom line of the trading robots 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, stablecoins, altcoins and NFTs.

Read: UN urges Kenya to tax players in the crypto sector and ban ads

Considering this, experts argue, the use of both direct and indirect taxes will be more effective.

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

Low tax havens

Although there is no official data on digital assets in Kenya, private research and surveys have revealed a bubbling industry in the country.

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

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

Low fees charged by crypto exchanges, speed of transfers and Internet access were factors attributed to an increase in the use of digital assets in Kenya.

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

But long-term owners avoid tax entirely on digital assets by investing in low-tax havens on the Caribbean island.

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

“A tax rate of 3.0 per cent seems fair and manageable at this stage, but policymakers must avoid changing their position, which could cause investors to reconsider their stance,” he says.

“The best way to deal with cryptocurrency is to welcome it and have a tax level that makes investors want to be transparent and pay their due tax on gains. A fair tax system will retain existing investors while attracting much-needed inflows.”

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