Why the Blockchain Association of Kenya opposes the Finance Bill’s taxation of cryptocurrencies

The Blockchain Association of Kenya (BAK) recently submitted its views on the proposed Digital Asset Tax (DAT) under the Finance Bill 2023 to the National Assembly’s Departmental Committee on Finance and National Planning. While BAK recognizes the importance of recognizing and legitimizing digital assets, BAK raises several concerns regarding the bill’s approach to taxation.

Digital Asset Tax (DAT) is proposed to be levied on income from the transfer or exchange of digital assets at a rate of 3% of the transfer or exchange value of the digital asset. The Digital Asset Tax (DAT) appears to be a measure aimed at taxing the profits or gains individuals make when they engage in transactions involving digital assets such as cryptocurrencies, tokens or other digital forms of value.

The Blockchain Association of Kenya’s opposition to the Finance Bill’s taxation of cryptocurrency stems from the belief that a comprehensive and well-informed approach is needed. While BAK recognizes the potential of digital assets, BAK emphasizes the need for proper engagement, education and training before taxation is implemented.

The following were the most important highlights of BAK’s submission:

1. Lack of comprehensive understanding and regulation

BAK emphasizes that the introduction of a Digital Asset Tax signals the Kenyan government’s recognition of the blockchain and cryptocurrency sector. However, it cautions against rushing into taxation without a comprehensive understanding of the industry. Cryptocurrencies are still in the early stages of adoption in Kenya, and their unique characteristics require nuanced regulation and taxation. Implementing taxation without considering the different characteristics and uses of each digital asset can lead to unintended consequences and hinder the potential benefits of cryptocurrencies.

2. Unclear classification of digital assets

The blockchain industry has given rise to various digital currencies and tokens, each with its own unique characteristics and applications. BAK argues that taxing all digital assets under a single umbrella could stifle innovation and hinder the growth of specific sectors of the industry. It suggests that a more effective approach would involve considering the classification of digital assets, such as utility tokens, security tokens, governance tokens, non-fungible tokens (NFTs), stablecoins, asset-backed tokens and payment tokens. By implementing appropriate taxes based on the use cases of each token, the government can support the industry without hindering innovation.

3. Ambiguity around transfers of digital assets

Defining what constitutes a transfer of digital assets is essential for effective taxation. BAK highlights that digital assets can be acquired in various ways, such as mining, staking, swaps, airdrops and initial coin offerings (ICOs). Therefore, it requires a clear definition of transfers to avoid confusion and ensure accurate taxation. It proposes that taxes such as capital gains tax, income tax and excise duties can be triggered based on the successful movement of digital assets, the generation of taxable profits from digital service providers and the payment of transaction fees, respectively.

4. Impractical timeframe for 24-hour remittance

The Finance Bill’s requirement to repay digital wealth tax within 24 hours of deduction presents practical challenges for implementation. Converting digital assets to fiat currency, such as Kenyan shillings, involves a process called off-ramping, which can take several business days. In addition, the complex nature of calculating tax liabilities for transactions involving different tokens further complicates the process. BAK suggests that there is a need for investment from both authorities and industry players to establish payment rails and overcome these challenges.

5. Failure to assess loss-making transactions

BAK points out that the proposed Digital Asset Tax functions as a minimum tax and fails to consider loss-making or zero-profit transactions. It refers to a recent court decision that declared similar provisions in the Income Tax Act unconstitutional. The volatility and speculation of digital assets means that not all transfers and exchanges result in profit. Ignoring this aspect can lead to unfair taxation and hinder the growth of the industry.

6. Need for comprehensive compliance and enforcement framework

BAK believes that prioritizing the development of a holistic institutional framework is essential before implementing cryptocurrency taxation. Full integration of cryptocurrencies into the Kenyan financial system requires a thorough understanding of their use cases and seamless interaction with the conventional financial sector. In addition, education and awareness about cryptocurrencies will help establish trust and create an enabling environment for the industry to thrive.

7. Capacity building for key stakeholders

BAK highlights the need for capacity building among key stakeholders, including the committee responsible for reviewing the finance bill. Engaging with industry experts, stakeholders and the public is critical to gaining a deeper understanding of the cryptocurrency ecosystem and developing regulations that strike a balance between tax obligations and industry growth. BAK is committed to promoting collaboration and offering technical expertise to support informed decision-making.

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