Cryptocurrency tax could hinder trade in digital assets

DAT singles out digital assets for special and disadvantageous treatment compared to other asset classes. [File, Standard]

The only turnover-based tax that has been successful in Kenya is 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.

In 2022, Indonesia introduced tax which was applied on a withholding tax basis at the rate of 0.1 per cent of the gross value of cryptocurrency transactions.

Following the introduction, trading volumes on local cryptocurrency exchanges fell by approximately 60 per cent. The significantly higher tax rate is likely to have a chilling effect on the trade in digital assets and could drive many of the transactions underground.

Another important consideration is the administrative burden that DAT will impose on the platform owners who are required to remit the DAT deducted into Kenya Revenue Authority (KRA) accounts at authorised banks within 24 hours of the transaction.

This is likely to be a tall order given guidelines issued by the Central Bank of Kenya (CBK) against the trade in cryptocurrency. As a result of these guidelines, many cryptocurrency platforms are unable to open and operate bank accounts locally.

The decision to provide for the taxation of digital assets by the government while there is an active advisory against the trade by a government regulator is contradictory, and it may be time for the government to put in place a mechanism for safe trade and equitable taxation of digital assets.

The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG