The Kenya Revenue Authority (KRA) will go after the more than four million Kenyans who own cryptocurrencies if MPs approve changes to the law aimed at regulating and taxing the fast-growing digital currency trade.
The Capital Markets (Amendment) Bill, 2022 seeks to introduce taxation of the crypto exchanges and digital wallets and imposes transaction taxes akin to excise duty charged on bank transactions.
Banks deduct 20 percent excise duty on all commissions and fees charged on transactions.
Kenyans will pay the KRA capital gains for the increased market value of the crypto when they sell or use the digital currencies in a transaction if the Bill is approved.
Those who have made trading in cryptocurrencies a business are likely to be liable for income tax on their earnings.
“Where the digital currency is held for a period not exceeding twelve months, the laws relating to income tax shall apply or for a period exceeding twelve months, the laws relating to capital gains tax shall apply,” the Bill, sponsored by Mosop MP Abraham Kirwa, says.
This would mark the first time Kenya will bring cryptocurrencies mainstream and extend regulation to the dealings in digital currencies.
The sector is not regulated in the country and remains largely unregulated even in the developed world.
This makes it difficult to establish the value of digital assets held by the mostly tech-savvy Kenyans, but the amount could run into billions of shillings.
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The Bill requires persons who own or deal in digital currency to provide the Capital Markets Authority (CMA) with specific information for tax purposes.
Those owning or dealing in digital currency will be required to furnish the regulator with information regarding the amount of the virtual currency in Kenya shillings.
They will also be required to inform the CMA of the type of virtual currency transacted in, the date on which the virtual currency was acquired and the date on which the virtual currency was sold.
“A person who possesses or deals in digital currency shall provide the Authority with the following information for tax purposes—the amount of proceeds from the transaction, any costs related to the transaction and the amount of any gain or loss on the transaction,” the Bill states.
The Bill comes nearly six months after a United Nations report showed that Kenya has the largest share of its population with cryptocurrencies in Africa, pointing to the country’s exposure to the ongoing meltdown in the crypto market.
The report by the United Nations Conference on Trade and Development (UNCTAD) released in June said that 8.5 percent of the population or 4.25 million people own cryptocurrencies in the country.
This places Kenya ahead of developed economies such as the United States, which is ranked sixth with 8.3 percent of its population owning digital currencies.
The crypto market, known for its wild price swings, recently shed more than half of its value since November last year as investors pulled out money from riskier assets amid worries over soaring inflation and rising interest rates.
This has hit the estimated four million Kenyans, mainly young and small traders, who in recent years have flocked to cryptocurrencies in the hope of quick returns, despite warnings from regulators such as the Central Bank of Kenya (CBK) that the emerging assets can be high-risk.
CBK governor Patrick Njoroge in an advisory to Kenyans said cryptocurrencies posed risks to financial stability but they could be used to solve problems such as bringing the poor into the financial system or cutting transaction costs.
Kenyan investors buy cryptocurrencies to preserve their savings, carry out international transactions either for individual remittances for those working in places like Europe and North America or for commercial use such as purchasing goods to import and sell, says Chainalysis.
Payment for imports through cryptocurrency is seen as convenient and quick because the traders don’t have to buy dollars using the Kenya shilling or fork out fees to money transfer firms such as Western Union.
“The amendment will provide for specific provisions to govern digital currency transactions in Kenya, including the definition of digital currencies, its creation through crypto mining and provide for regulations around trading of digital currencies,” Mr Kirwa said.
“The amendment will also outline responsibilities of persons or businesses trading in digital currencies, provide for its taxation, ownership and provide for promotion of innovation in this area.”
The first-term MP said the changes to the CMA Act will encourage citizen participation in an equitable and decentralised financial system that utilises smart contracts, connecting Kenyans to global markets.
“Within six months of the enactment.. a person trading in digital currencies shall apply to the Authority for a licence,” the Bill says.
The CMA will ensure Kenya has a centralised electronic register of all transactions in digital currencies.
The Bill seeks to protect Kenyans from risks associated with the unregulated cryptocurrency trade.
It seeks to amend the Capital Markets Act to include a digital currency into the definition of securities.
The CMA will have the power to issue a licence to individuals trading in digital currencies.
UNCTAD in a policy brief in June asked Kenya and other developing countries to regulate and tax the cryptocurrency industry to limit exposure to the meltdown in the crypto market and risks of financial instability.
The UN body proposed enforcing mandatory registration for crypto exchanges and digital wallets and tax transactions to make the sector less attractive.
“A person who trades in digital currencies shall keep records of digital currency transactions, including purchases and sales, pay taxes on any gains that are made from transactions in digital currencies in accordance with the applicable laws,” the Bill states.
The crypto sector has made a stab at a piece of the tax haven pie since it is largely unregulated despite its growing popularity.
Crypto exchanges are platforms operated by companies where investors buy and sell digital tokens such as Bitcoin, Etherum and Tether among other coins.
UNCTAD also wants banks and other financial institutions blocked from holding stablecoins and cryptocurrencies or offering related products to clients.