Will the taxman’s new interest in digital assets push crypto adoption in Kenya? 

The Capital Markets (Amendment) Bill 2022 proposes taxation of crypto exchanges and digital wallets. If it goes through, taxes on digital currencies will be set in line with the current excise duty for bank transactions, which is at 20% on all transaction fees and commissions. 

The bill by first-term MP Abraham Kirwa comes months after a UNCTAD report revealed Kenya has 8.5% of its population as crypto holders, placing it ahead of super economies, such as the US. Following the report, UNCTAD proposed mandatory regulation and tax sanctions for the crypto industry to make it less attractive. 

It seems Kenya has taken the cue from the UN body and legislators are now championing for regulation of the highly volatile industry. The headline stirred the crypto community, invoking mixed reactions from enthusiasts and critics alike.

Let’s break down the proposed bill…

Although, there are plenty of things to deduct from the proposed amendment, the underlying highlight is that the industry would need some kind of regulation to effect the Act. 

Cryptocurrency holders and traders will need to update their records with the Capital Markets Authority and provide their information for tax purposes.  The information required will include the date of purchase and sale of the digital assets, type of cryptocurrency, and its equivalent amount in KES. 

Digital currencies held for more than a year will be subject to capital gains tax, while KRA will expect income tax from assets held for under twelve months. 

According to the bill, the CMA will keep a centralized electronic register of all digital currency transactions. The financial regulator will also issue licenses to traders six months after being in effect. 

But, perhaps, what stands out the most is that the move would force the Kenyan government to acknowledge digital assets, which have largely been ignored, as is the case in many countries. 

So, is this a good or bad thing? 

As expected, the early Monday morning evoked mixed reactions from the crypto community in Kenya. 

For some in the industry, the regulation of the risky crypto industry could be the catapult mass adoption has been waiting for. The bill would have the government, through CMA, recognize digital currencies as securities and give provisions to govern these transactions. Reason being, the taxman cannot come knocking on that which is illegal. 

Even with one of the highest crypto adoption rates, a majority of the Kenyan population remains wary of digital assets. And it’s no help that crypto crimes have been quite rampant in the country. 

In June of this year, reports emerged that Kenyans had lost up to billions to crypto scams. During the same month, university students were caught hacking credit cards and converting the stolen money to Bitcoin to cover their tracks. 

Related: Kenyan university students arrested over bitcoin fraud scheme

For these and more reasons, the government has largely been against bitcoin and other cryptocurrencies for years, going as far as issuing cautionary notices to the public and to local banks against the use of digital assets. What’s more is that the chairperson of the President’s Council of Economic Advisors, Dr. David Ndii, has long been anti-crypto, and is on record calling the industry a big scam project. 

If the proposed bill is approved, will the government change its tune on matters concerning digital currencies? 

While some expressed optimism over the taxation of cryptocurrencies, several other crypto users raised their concern over how the matter is being handled. At the top of the list is the fact that the government seems to be contradicting itself, as one Twitter user pointed out. 

What’s a paradox?!

CBK doesn’t want anything to do with cryptocurrencies & it’s issuing warnings left, right & centre..

KRA wants to tax cryptocurrencies that CBK does want to foster or help make safer!

This government is so confused!https://t.co/Px06awyRb5

— Rutto (@wakilinomad) November 21, 2022

On the one hand, the Central Bank of Kenya has been adamantly against cryptocurrencies over the years. Now, another arm of the government is proposing taxes on an asset not recognized as legal. How is that possible? 

Interestingly, despite the CBK’s negativity towards cryptocurrencies, the regulator is open to the idea of a Central Bank Digital Currency (CBDC)- a form of digital currency issued and controlled by a nation’s central bank. 

Early this year in March, the Central Bank of Kenya (CBK)  governor remarked that the restrictions on crypto assets had been due to their increased usage in illegal activities, and not the lack of regulatory measures. These remarks came soon after the regulator issued a discussion paper for the public to air opinions on the possibility of a CBDC. 

Financial advancements, or just another tax gimmick? 

Perhaps the most important question we should be asking is the intent behind the proposed bill. 

Not surprisingly, the proposal that would see the KRA’s tax collection pool increase significantly, comes at a time when the relatively new government is still settling in. 

Since his swearing in, President Ruto has been vocal over the country’s tax system, raising concerns over the low revenue collection. He announced that his government was working on expanding KRA’s tax base to 4 trillion, up from 2.03 trillion at the end of the last financial year. 

Kenya is reeling in foreign debt, which has increased six fold since 2013. As such, the government is working on a strategy to reduce reliance on foreign debt by increasing the amount of revenue collected. This overall strategy comprises a bunch of tax reforms, including introducing the wealth tax to high-income individuals, and ensuring everyone above age 18 is brought into the tax bracket. 

It’s feasible that the Capital Market (Amendment) Bill 2022 is just another way to hit the tax targets. 

My take

Quite similarly to what other enthusiasts believe, news of taxation and regulation in the industry is always welcome as it legitimizes the industry. It shows that the regulators are having these crypto conversations behind their closed doors. The crypto space isn’t going unnoticed, and that is always good news. 

Regulation is indeed necessary, if we are to weed out the bad players. The current crypto winter has further proven why we need to be more vigilant, with cases such as the FTX collapse losing the industry billions. 

The proposed bill claims to protect the consumer’s interest, yet has no stipulations whatsoever of how to achieve that. All that’s outlined seems to be in line with just how the government will earn its revenue, rather than regulating the risky industry. 

This move by the Kenyan government seems hurried and not well thought through. The bill proposes a centralized record of all digital transactions. Does the same currently exist for bank transactions? And what’s with the conflicting opinions by regulatory arms of the same government? 

For the crypto industry to achieve its full potential, we must use a holistic approach that blends government processes and structures with those of the corporate sector. If done well, taxation with regulation will surely bring about more crypto adoption. But, a haphazard proposal for taxation without regulatory measures may cause more harm than good to the industry’s overall health. 

For now, it’s a wait and see situation.