Lack of clarity on cryptocurrency status in Nigeria could make it challenging to collect newly introduced taxes, experts told Decrypt.
The Finance Act of 2023, signed by Nigeria’s outgoing President Muhammadu Buhari, introduced sweeping changes to the country’s income drive, including the introduction of a 10% capital gains tax on profits made on the sale of digital assets from May 1, 2023. The country’s Security and Exchange Commission (SEC) has clarified that digital assets include cryptocurrencies, security tokens, and non-security tokens.
It marks another step in the slow march towards official recognition of cryptocurrency in Nigeria, which is ranked 11th on the 2022 Global Crypto Adoption Index by Chainalysis.
But experts say getting crypto traders to pay the tax can be difficult. “It is difficult to understand Nigeria’s position on the cryptocurrency issue,” said Timi Olagunju, a policy advisor specializing in technology law.
Olagunju explained that since cryptocurrency transactions cannot be audited like bank transactions, the tax authorities will be at the mercy of crypto traders to self-report their profits that can be taxed.
A tax officer with the Lagos state government in southwestern Nigeria, who spoke to Decrypt on the condition of anonymity, said the “opaque nature” of some crypto transactions and an aversion to self-declaration taxes in the country will cut deeply into potential taxes the government will collect from digital assets.
“The government should hope digital asset traders report their profits and pay taxes voluntarily,” the source told me Decrypt. “But I’m not optimistic that that will happen much.”
According to the Federal Inland Revenue Services, which collects taxes for the Nigerian government, only 41 million Nigerians had registered to pay taxes in 2021.
The Uncertain Status of Crypto
The problem is further complicated by the uncertain status of cryptocurrency in Nigeria. In 2021, the country’s central bank, the CBN, ordered banks in the country to immediately cancel their services for customers buying, selling or trading cryptocurrencies. It then clarified that while individual citizens are free to trade crypto, Nigerian banks are prohibited from trading crypto assets or – crucially – facilitating payments to and from crypto exchanges.
At the time, the CBN expressed concern that the anonymity offered by virtual currencies could encourage fraud, terrorist financing – two of the biggest problems facing the country – and volatility.
The effect of the banking ban is to force users to resort to OTC deals and an informal peer-to-peer marketplace. “Basically, the ban only forced the fiat channels underground,” Danny Oyekan, CEO of investment firm Dan Holdings and social payment app Coins App, told me. Decrypt at the time.
The SEC reiterated its opinion on cryptocurrency earlier this month. “Nigerian investors are hereby warned that investing in crypto assets is extremely risky and may result in the total loss of their investment,” the SEC said in a June 2023 circular targeting a fraudulent company using the crypto exchange name Binance.
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With no formal recognition and the government chasing banks that facilitate the exchange of crypto transactions, the new tax may dampen interest in digital assets, said Emeka Ezike, the vice president of Stakeholders in Blockchain Technology Association of Nigeria (SiBAN).
He stressed that without a long-term plan, taxation will dwarf its potential contribution to the country’s struggling economy.
“But the opportunity here is that the federal government has recognized the industry, and that gives it a starting point to negotiate with policymakers on a friendlier process to ensure the market thrives,” Ezike said.
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A cloudy future
As Nigeria navigates the complex landscape of digital wealth taxation and blockchain technology, the future remains uncertain, but full of potential.
In May 2023, Nigeria launched a national policy that will boost the adoption of blockchain technology. In particular, the policy recognizes the legitimacy of cryptocurrencies and cryptocurrency exchanges despite the caveats of the CBN and SEC.
The document explains that the National Blockchain Policy will provide a “framework for the use of cryptocurrencies, among others, that can help mitigate risks such as money laundering and fraud. This can help build trust in cryptocurrency and make it more accessible to businesses and individuals in Nigeria.”
It refers to the possibility of the Nigerian government setting standards for the listing and trading of cryptocurrencies on regulated exchanges in the country.
The SEC itself is focusing on tokenization and plans to develop a pilot program for an allowed liquidity pool of tokenized bonds and deposits.
Nigeria’s Crypto Future Still Cloudy Despite Tokenization Push
Still, authorities are tight-lipped about the status of cryptocurrency in the country. A spokesperson for the Federal Inland Revenue Service declined to comment when contacted.
The new tax policy has raised questions and concerns among industry stakeholders, who are closely monitoring the impacts, challenges and opportunities.
While organizations such as SiBAN recognize the importance of tax policy, they acknowledge that it also indicates that the “government has recognized the industry,” providing an opportunity “to negotiate with policymakers on a friendlier process to ensure the market thrives.” “