As Kenya grapples with the rapid expansion of the crypto industry, the government is actively considering comprehensive measures to regulate and tax this burgeoning sector. Amidst growing concerns about potential tax evasion and financial instability, policymakers have put forth a series of proposals aimed at integrating cryptocurrency transactions into the existing tax framework.
How is Kenya’s crypto market different from other countries?
Kenya’s crypto market stands out in several ways compared to other countries:
- Adaptation and Regulation
Kenya has actively embraced cryptocurrency despite initial caution from the Central Bank of Kenya (CBK). Unlike some countries that have outright banned crypto, Kenya allows legal trading and holds a significant amount of Bitcoin.
The proposed Capital Markets Amendment Bill 2023 aims to regulate crypto transactions, imposing income tax obligations on traders and introducing capital gains tax and VAT on crypto transactions.
- Taxation Approach
Starting from September 1, 2023, Kenya imposes a fixed 3% tax on all cryptocurrency transactions, irrespective of gains or losses. This approach differs from countries that tax based on profits.
- Money Remittance Licensing
Kenya requires cryptocurrency companies to obtain licenses for money transmission services. This ensures transparency and accountability within the crypto ecosystem.
Failure to comply with licensing requirements can lead to suspension of banking services, as seen in cases like Lipisha Consortium Limited and Bitpesa.
- Market Size and Adoption
Kenya’s crypto market is substantial, with more than $1.5 billion worth of Bitcoin held, accounting for 2.3% of Kenya’s GDP. Other cryptocurrencies are also actively traded.
Kenyans continue to legally buy and sell cryptocurrencies, demonstrating widespread adoption.
- Balancing Risks and Opportunities
Kenya seeks to strike a balance between revenue generation, risk mitigation, and fostering innovation. Education, technology, and international collaboration play crucial roles in shaping its crypto approach.
The country has been actively considering ways to regulate and tax the crypto industry. Here are key proposals and considerations
1.Income Tax for Crypto Traders
Under the proposed Capital Markets Amendment Bill 2023, crypto traders would be required to pay income tax based on their tax band for income or trade profits generated from cryptocurrency transactions. This ensures that crypto trading is integrated into the existing tax framework.
2.Capital Gains Tax
Kenya aims to impose a capital gains tax of 15% on the net gains realized by crypto traders. This tax would apply when traders sell or use their cryptocurrencies in transactions.
3.Value Added Tax (VAT)
The Value Added Tax (Electronic, Internet, and Digital Marketplace Supply) Regulations, 2023 proposes a 16% VAT on the facilitation of online payments or exchange of digital assets, including cryptocurrencies. Exchanges must remit 16% of transaction costs as VAT for the services provided.
4.Digital Asset Tax (DST)
Kenya’s Finance Bill introduces two classes of Digital Asset Tax (DST):
- Class A: A 3% tax on income derived from transferring or exchanging digital assets (including cryptocurrencies).
- Class B: Exchanges and DeFi platforms are subject to a 1.5% DST levy on digital services. However, there are discussions about adopting a global framework for taxing multinationals by the Organization for Economic Cooperation and Development (OECD) in 20241.
5.Collaboration with Industry Stakeholders
Kenya should engage with crypto exchanges, blockchain associations, and industry experts to create a robust regulatory framework. Collaboration ensures effective implementation and addresses industry-specific challenges.
6.Education and Awareness
Educate taxpayers about their obligations regarding crypto taxation. Raise awareness about the benefits of transparent reporting and compliance.
7.Blockchain-based Tracking and Reporting
Explore blockchain solutions for tracking crypto transactions. Encourage exchanges and traders to report transactions accurately.
8.Anti-Money Laundering (AML) Measures
Implement AML regulations specific to crypto transactions. Monitor suspicious activities and enforce compliance.
9.Regular Audits and Reporting
Conduct regular audits of crypto exchanges and traders. Ensure transparency and accountability.
10.Global Best Practices
Learn from other countries’ experiences in taxing cryptocurrencies. Adopt best practices while tailoring them to Kenya’s context.
The proposed Capital Markets Amendment Bill 2023 seeks to impose income tax obligations on crypto traders, aligning their tax liabilities with traditional income streams. Additionally, plans are underway to implement a capital gains tax and Value Added Tax (VAT) on cryptocurrency transactions and digital asset exchanges. These measures not only aim to generate revenue for the government but also to foster transparency and accountability within the crypto ecosystem. Furthermore, Kenya is exploring collaboration with industry stakeholders and adopting global best practices to ensure effective regulation and mitigate risks associated with the crypto market. As the nation navigates this evolving landscape, education, technological innovation, and international cooperation emerge as crucial pillars in shaping Kenya’s approach towards crypto taxation and regulation1.
Taxation of cryptocurrencies in Kenya. Why it’s crucial.
The New Taxation Framework
Until recently, the taxation of cryptocurrencies in Kenya was based on whether individuals were actively trading or not. Active traders were subject to ordinary income tax, while those not actively involved in trading fell under the capital gains tax regime.
However, the landscape changed dramatically with the Finance Act of 2023. Starting from September 1, 2023, all cryptocurrency transactions are subject to a fixed tax rate of 3%. This means that every time a cryptocurrency is bought, sold, exchanged, or transferred, a 3% tax is charged on the transaction amount. Importantly, this tax is not based on gains1.
What Constitutes a Digital Asset in Kenya?
The Finance Act of 2023 defines a digital asset in Kenya as “anything of value that is not tangible and cryptocurrencies, token code, number held in digital form and generated through cryptographic means or otherwise.”
This comprehensive definition includes tokens and non-fungible tokens (NFTs) and is designed to cover both current and future forms of digital assets within the crypto industry1.
Types of Transactions Subject to Digital Asset Tax
Under the new digital asset tax, several types of cryptocurrency transactions are subject to the 3% tax, including:
- Airdropped tokens
- Sale of tokens for stable coins (e.g., selling Bitcoin for USDT)
- Sale of tokens for another token (e.g., Bitcoin for Ethereum)
- Purchase of a token with another token (e.g., buying $Pandora with $Grok)
- Purchase or sale of NFTs1.
Tax Collection Responsibility
The Finance Act places the responsibility of tax collection on intermediaries, such as centralized and decentralized exchanges, as well as project teams distributing rewards to Kenyan participants.
These intermediaries are required to deduct the digital asset tax from the transaction and remit it to the Kenya Revenue Authority (KRA).
Why Is It Important?
- Transparency and Accountability: Regulations ensure transparency within the crypto ecosystem. By imposing rules on exchanges, transactions, and taxation, the government can monitor activities and prevent illicit practices.
- Risk Mitigation: The crypto market is volatile and poses risks such as fraud, money laundering, and financial instability. Regulations help mitigate these risks by setting standards and enforcing compliance.
- Investor Confidence: Clear regulations attract investors. When investors perceive a regulated environment, they are more likely to participate in the crypto market.
- Cross-Border Implications: Kenya’s approach can serve as a model for other African countries. By sharing best practices, African nations can collectively create a harmonized regulatory framework.
- Education and Innovation: Educating citizens about crypto is crucial. Regulations should be accompanied by awareness campaigns to empower users and prevent misinformation.
- AfCFTA Integration: The African Continental Free Trade Area (AfCFTA) provides a platform for collaboration. Member states can discuss and adopt common crypto regulations, fostering regional growth