Crypto tax: it is time to remove barriers to trade in digital assets

The Finance Bill, 2023 (The Bill) proposes to introduce a Digital Asset Tax (DAT) at a rate of 3.0 percent on the income derived from the transfer or exchange of digital assets.

The Bill defines a digital asset as anything of value that is not tangible and includes cryptocurrencies, token code, and numbers held in digital form which can be exchanged with or without consideration and can be transferred, stored or exchanged electronically.

DAT is one of the ways that the government is exploring to expand the tax base, especially considering recent press reports that millions of Kenyans are involved in cryptocurrency trading.

However, if implemented as proposed, the DAT will lead to multiple instances of double taxation. For instance, a typical trade in cryptocurrencies involves an initial transfer of fiat currency into stablecoin (which is pegged to fiat currency), followed by the exchange of stablecoins for cryptocurrencies, exchange of one cryptocurrency for another before eventually the cryptocurrencies are exchanged for cash.

The proposed DAT would tax the same transaction on several instances before conversion to cash.

Additionally, DAT singles out digital assets for special and disadvantageous treatment compared to other asset classes.

For instance, when trading in shares, only the gains from the trade are taxed. This treatment is also extended to business income which is taxed on the profit and not turnover.

The proposed DAT taxes digital assets on their turnover irrespective of whether the transfer results in a loss. This is especially important considering the volatility in digital assets trade.

The imposition of DAT on turnover rather than profit is similar to the ill-fated attempt to introduce minimum tax which the Court of Appeal declared unconstitutional as it discriminated against persons in a loss-making position.

The only turnover-based tax which has been successful in Kenya is a turnover tax and this is only because taxpayers can opt out if they believe that their tax affairs are best handled under the normal tax provisions.

Some countries such as India and Indonesia have unsuccessfully tried to introduce a similar form of tax, but this had a chilling effect on the market.

The writer is a senior tax advisor with KPMG Advisory Services Limited.