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  • The Blockchain Association of Kenya (BAK) submitted its opinions on the proposed Digital Asset Tax under the Finance Bill 2023.
  • The absence of a deliberate policy position on digital assets amounts to a decision with consequences for tax systems.
  • The BAK’S opposition to the Finance Bill 2023 taxation of cryptocurrencies stems from the belief that a comprehensive and well-informed approach remains necessary.

The crucial role of digital assets and the need for clear taxation policies

Cryptocurrencies have become increasingly important in business and commerce, given their growing adoption by institutions, businesses, and individuals globally. Thus, the impact of crypto assets on tax systems has become all but impossible to ignore. As the number of transactions involving crypto assets continues to rise, so does the need for governments to establish a clear policy on taxing such transactions. In such a context, the absence of a deliberate policy position on the crypto industry amounts to a decision with consequences for tax systems.

Kenya remains a leading country in Africa and globally in cryptocurrency adoption. The leads developed countries, including South Africa, China, and the United States, according to a 2022 report from Chainalysis. Only Ukraine, Pakistan, India, and Vietnam rank higher in the overall adoption of digital assets. Additionally, Kenya ranks top in peer-to-peer (P2P) cryptocurrency transaction volumes.

Kenya’s Ministry of National Treasury & Economic Planning has proposed the creation of a Digital Asset Tax that targets transactions involving cryptocurrencies in the Finance Bill 2023. The proposal to tax cryptocurrencies comes despite the CBK warning financial institutions and the general public against cryptocurrencies.

The Finance Bill 2023 requires individuals undertaking transactions of digital assets, including cryptocurrencies, to pay taxes. Under the Finance Bill 2023, crypto represent valuable intangible assets generated through cryptographic or related means. These digital assets include non-fungible and related tokens. The Finance Bill proposes a tax for digital asset transactions at 3 per cent of the transfer or exchange value.

READ MORE: Understanding NFTs and the new opportunities to monetize art

Blockchain Association of Kenya on Digital Asset Tax in the Finance Bill 2023

The Blockchain Association of Kenya (BAK) submitted its opinions on the proposed Digital Asset Tax under the Finance Bill 2023 to the National Assembly’s Departmental Committee on Finance and National Planning. While reemphasizing the significance of recognizing and legitimizing digital assets in Kenya, BAK has pointed out several issues regarding the proposed taxation approach.

The Kenya Revenue Authority will impose a 3 percent Digital Assets Tax upon the income derived from transferring or exchanging digital assets under the Finance Bill 2023. The tax seems like a measure to tax the profits or gains made by individuals when they engage in transactions involving cryptocurrencies, tokens, or other digital forms of value.

The BAK’S opposition to the Finance Bill 2023 taxation of cryptocurrencies stems from the belief that a comprehensive and well-informed approach remains necessary. While acknowledging the potential of digital assets, BAK affirms the need for proper education, training, and engagement before implementing the Digital Asset Tax.

Lack of proper regulation and understanding of crypto in Kenya

BAK underscores that introducing a Digital Assets Tax under the Finance Bill 2023 indicates that Kenya’s government recognizes the crypto sector. However, BAK warns against rushing into the taxation of digital assets without a proper understanding of the industry. The crypto industry remains in the nascent adoption stage in Kenya. Consequently, their unique characteristics require distinctive taxation and regulation. Implementing the Digital Assets Tax without considering the specific applications and features of digital assets may lead to unintended consequences. Consequently, this could hinder the potential benefits of the crypto industry in Kenya.

Vague classification of digital assets

The crypto industry in Kenya has given rise to various digital assets and tokens, each with unique applications and characteristics. According to the BAK, umbrella taxation of digital assets could stifle innovation and hinder growth within the crypto industry. According to BAK, a more effective approach would involve considering the more specific classification of digital assets. This would include differentiating between security, utility, governance, non-fungible, payment, and asset-backed tokens. Implementing the appropriate taxes based on the use cases of each token would help the government support the industry without hampering innovation.

The ambiguity surrounding transfers of digital assets

Defining what constitutes a transfer of digital assets remains crucial for an effective Digital Asset Tax. BAK has highlighted that the acquisition of digital assets takes different forms. These include staking mining, airdrops, swaps, and initial coin offerings (ICOs). Therefore, a clear definition of transfers remains to avoid confusion and ensure accurate taxation. BAK proposes that taxes, including capital gains tax, income tax, and excise duty, can be triggered based on the successful movement of digital assets, generation of taxable profits by digital service providers, and payment of transaction fees, respectively.

Unrealistic 24-Hour remittance period

The Finance Bill 2023 requires 24 hours to remit the Digital Asset Tax. This requirement presents practical challenges for implementation. Converting digital assets into fiat currency, such as Kenyan Shillings, involves off-ramping, which can take several business days. The complex nature of calculating tax liabilities for transactions involving different tokens further complicates the process. BAK suggests the government and the crypto industry players invest in establishing payment rails and overcome these challenges.

Consideration loss-making transactions

BAK has pointed out that the proposed Digital Asset Tax is a minimum tax. As such, it fails to consider loss-making or zero-profit transactions. BAK refers to a recent court ruling declaring similar provisions in the Income Tax Act unconstitutional. The volatility and speculative nature of digital assets mean that not all transfers and exchanges result in profits. Ignoring this aspect could lead to unfair taxation and hinder the industry’s growth.

Focus on a comprehensive regulatory framework for digital assets

BAK believes that prioritizing the development of a comprehensive framework for regulating the crypto industry remains essential before implementing the Digital Asset Tax under the Finance Bill 2023. Proper regulation and full integration of cryptocurrencies into the Kenyan financial system require a thorough understanding of their use cases and seamless interactions with the conventional monetary structure. Additionally, raising awareness and prioritizing education on cryptocurrencies will establish trust. Consequently, it will create an enabling environment for the crypto industry in Kenya to thrive.

Capacity building for key industry players

BAK highlights the need for capacity building among key industry players, including the committee responsible for reviewing the Finance Bill 2023. Engaging with experts, stakeholders, and the general public remains crucial to understanding the crypto industry properly. That understanding will help develop regulations that balance obligations such as the Digital Asset Tax and industry growth. BAK also reiterates its commitment to promoting collaboration and offering technical know-how for informed decision-making.

READ MORE: African governments postponing an inevitable crypto world

Source of original article: Get Latest Tech & Business news From Africa and Worldwide (theexchange.africa).
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