Kenyans will be required to pay a tax of three per cent from the revenue they make by selling a digital asset from Friday (September 1) as the law that has put in place the new tax takes effect.
The Finance Act 2023 has introduced a digital assets tax payable on the income derived from the sale of digital assets effective from September 1 as the State seeks to take a pie of the growing digital assets economy.
The Act defines digital assets as anything of value that is not tangible, which means the tax will cover a vast array of assets, including e-books, photos, documents, videos, logos, content, music, audio, animations, illustrations and social media accounts. It also includes cryptocurrencies, token codes or numbers held in digital form and generated through cryptographic means and non-fungible tokens.
Blockchain analytics firm Chainalysis, which ranks countries on crypto adoption, last year revealed that Kenya has about four million individuals who own cryptocurrencies.
According to the Act, whenever a digital asset is sold, the platform on which the sale has been made is mandated to deduct three per cent and then remit it to the Kenya Revenue Authority (KRA) within five working days.
“The owner of a platform or the person who facilitates the exchange or transfer of a digital asset shall deduct the digital asset tax and remit it to the commissioner,” says the Act.
Further, if a non-resident owns the digital assets exchange platform, the owner is required to register under the simplified tax regime to remit the tax.
“A person who is required to deduct the digital asset tax shall, within five working days after making the deduction, remit the amount so deducted to the commissioner together with a return of the amount of the payment, the amount of tax deducted, and such other information as the commissioner may require,” says the Act.
Treasury Cabinet Secretary Njuguna Ndung’u, in his budget address to legislators, lamented that Kenya was witnessing a sharp growth in digital assets trade yet the State was not deriving revenue from it.
“Despite the advantages brought about by digital platforms, the transactions usually conducted under the platforms are not in the tax net,” he said.
Tax experts have questioned the short window given to remit the tax to the KRA, arguing that it will cause them operational challenges and that the tax will digital assets trade.
“The requirement to remit the tax within five working days after making the deduction is administratively onerous. In addition, by taxing the turnover rather than the gains, the tax is likely to be a disincentive for persons seeking to engage in digital asset trading,” said tax experts at KPMG in their analysis of the Act.
Analysts at Grant Thornton Kenya say the decision to tax incomes derived from digital assets raises considerations such as the need for a potentially lower tax rate based on fair market value and addressing administrative obligations placed on providers of the platforms who in most cases are not resident.
“The Act should clarify whether the proposed tax is final or if additional taxes may apply, and the effective date of September 1, 2023 may require revision to allow ample time for compliance implementation, particularly for non-residents,” said the analysts.
Rufas Kamau, a market analyst at Nairobi-based financial markets broker FXPesa, says the government has not properly defined digital assets and that the tax is punitive and not consistent with other jurisdictions.
This, he said, would risk creating a black market for trading cryptocurrencies in a bid to evade taxes.
“I don’t think the government has defined digital assets well. If a company like Binance was to do this for all Kenyan traders, the traders would shift to another exchange that doesn’t require them to pay tax,” Mr Kamau told Nation on August 30.
“A better way of implementing taxation in digital assets would have been a charge on the spread or commission earned by an exchange when they facilitate a cryptocurrency transaction. This would promote people to innovate in this sector and build value and employment.”
