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 acknowledging the significance of recognizing and legitimizing digital assets, BAK raises several concerns regarding the bill’s approach to taxation.
The Digital Asset Tax (DAT) is proposed to be imposed on the income derived from the transfer or exchange of digital assets at a rate of 3% on 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 made by individuals 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 cryptocurrencies stems from the belief that a comprehensive and well-informed approach is necessary. While recognizing the potential of digital assets, BAK emphasizes the need for proper engagement, education, and training before implementing taxation.
The following were the key highlights of BAK’s submission:
- 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 warns 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 diverse characteristics and applications of each digital asset may lead to unintended consequences and hinder the potential benefits of cryptocurrencies.
- 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 within 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 impeding innovation.
- Ambiguity Surrounding Transfers of Digital Assets
Defining what constitutes a transfer of digital assets is crucial for effective taxation. BAK highlights that digital assets can be acquired through various means, such as mining, staking, swaps, airdrops, and initial coin offerings (ICOs). Therefore, it calls for 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 duty can be triggered based on the successful movement of digital assets, generation of taxable profits by digital service providers, and payment of transaction fees, respectively.
- Impractical 24-Hour Remittance Timeframe
The Finance Bill’s requirement to remit the Digital Asset Tax within 24 hours of making the deduction presents practical challenges for implementation. Converting digital assets into fiat currency, such as Kenyan Shillings, involves a process called off-ramping, which can take several business days. Additionally, the complex nature of calculating tax liabilities for transactions involving different tokens further complicates the process. BAK suggests that investment from both the government and industry players is needed to establish payment rails and overcome these challenges.
- Failure to Consider Loss-Making Transactions
BAK points out that the proposed Digital Asset Tax acts as a minimum tax and fails to consider loss-making or zero-profit transactions. It refers to a recent court ruling that declared similar provisions in the Income Tax Act as unconstitutional. The volatility and speculative nature of digital assets mean that not all transfers and exchanges result in profits. Ignoring this aspect could lead to unfair taxation and hinder the growth of the industry.
- Need for Comprehensive Compliance and Enforcement Frameworks
BAK believes that prioritizing the development of a comprehensive institutional framework is essential before implementing cryptocurrency taxation. The full integration of cryptocurrencies into the Kenyan financial system requires a thorough understanding of their use cases and seamless interactions with the conventional financial sector. Additionally, educating and raising awareness about cryptocurrencies will help establish trust and create an enabling environment for the industry to thrive.
- 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 crucial 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 fostering collaboration and providing technical expertise to support informed decision-making.