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Kenya’s new plan to tax digital assets queried

Kenya is banking on revenue from taxes on digital assets to bolster the plan to collect $18.3 billion in ordinary revenues – the highest in Kenya’s history – in the coming financial year, but experts warn that the state might be disappointed.

In a raft of new taxes to support the increased expenditure in the 2023/24 financial year is the three percent tax on transfer of digital assets, including cryptocurrencies and non-fungible tokens.

Treasury Cabinet Secretary Njuguna Ndung’u last week told parliament that taxing digital assets will create “equity and fairness” among taxpayers.

“Despite the advantages brought about by digital platforms, transactions usually conducted under the platforms are not in the tax net,” Prof Ndung’u said.

However, in the absence of any regulations for the digital assets industry in Kenya, experts argue that the proposed tax will neither benefit the State nor the industry and should not be enforced.

Markets analyst Rufas Kamau argues that without legislation that clearly defines digital assets and sets the Capital Markets Authority, for instance, as their regulating body, collecting the proposed taxes will only choke the sprouting industry, with meagre revenue yields.

“If the Kenya Revenue Authority is seeking to tax crypto transactions, the CBK must first withdraw these statements, because taxes can only be collected through banking or mobile banking infrastructure,” he told The EastAfrican.

“In addition, a regulatory framework for licensing and regulating crypto companies would have to be implemented along with a bill to establish crypto regulations.”

Similarly, Nigeria recently introduced a 10 percent tax on crypto gains, barely two years after its apex bank banned trading of the digital assets. Experts say it won’t work there either.

Crypto’s borderless nature

“If you want to tax crypto – and it’s okay to do that because crypto generates economic activity that can contribute to the country’s GDP – you must first create a framework and gather stakeholders around for policy formulation,” Obinna Iwuno, President of the Stakeholders in Blockchain Technology Association of Nigeria, told TechCabal.

According to Mr Kamau, who is the lead market analyst at Nairobi-based financial markets broker FXPesa, the government is putting the cart before the horse by trying to tax crypto gains without first ensuring the sector is regulated.

But, even with regulations in place, the government may still not collect as much from the digital assets due to possible regulatory arbitrage as users capitalise on regulatory loopholes in other countries due to the borderless nature of cryptocurrencies.

“Because builders can often choose their jurisdiction, irresponsible actors may prefer locations with a lighter touch [on regulations],” the World Economic Forum said in a recent white paper, in which it said global synergy will be fundamental for successfully regulating the crypto industry.

Source: Theeast African