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A lack of clarity over cryptocurrency’s status in Nigeria could make it challenging to collect newly-introduced taxes, experts told Decrypt.
The 2023 Finance Act, signed into law by Nigeria’s outgoing president Muhammadu Buhari, introduced sweeping changes to the nation’s revenue drive, including the introduction of a 10% capital gains tax on profits made in the disposal of digital assets from May 1, 2023. The country’s Security and Exchange Commission (SEC) clarified that digital assets encompass cryptocurrencies, security tokens, and non-security tokens.
It marks another step in the slow march to 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 may be difficult. “It is difficult to understand the stand of Nigeria on the issue of cryptocurrency,” said Timi Olagunju, a policy consultant who specializes in technology law.
Olagunju explained that since cryptocurrency transactions cannot be monitored like bank transactions, tax authorities will be at the mercy of crypto traders to self-report their profits on which tax could be levied.
A tax officer with the Lagos state government in southwest Nigeria, who spoke to Decrypt under condition of anonymity, said that the “opaque nature” of some crypto transactions and an aversion to self-reporting taxes in the country will cut deep into possible taxes the government will record from digital assets.
“The government has to hope that digital assets traders report their profits and pay taxes willingly,” the source told Decrypt. “But I’m not optimistic that will happen a lot.”
As of 2021, only 41 million Nigerians had registered to pay taxes, according to the Federal Inland Revenue Services, which collects taxes for the Nigerian government.
Crypto’s uncertain status
The issue 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 who buy, sell, or trade cryptocurrencies. It subsequently clarified that while individual citizens are free to trade crypto, Nigerian banks are prohibited from dealing in crypto-assets or—crucially—facilitating payments to and from crypto exchanges.
At the time, the CBN expressed concerns that the anonymity afforded by virtual currencies could foster fraud, terrorism financing—two of the biggest problems the country faces—and volatility.
The effect of the bank ban has been to force users to resort to OTC deals and an informal peer-to-peer market. “Basically, the ban only forced the fiat channels underground,” Danny Oyekan, CEO of investment firm Dan Holdings and social payments app Coins App, told Decrypt at the time.
The SEC reiterated its view on cryptocurrency earlier this month. “Nigerian investors are hereby warned that investing in crypto-assets is extremely risky and may result in total loss of their investment,” said the SEC in a June 2023 circular directed at a fraudulent company using the name of crypto exchange Binance.
With no formal recognition and the government hounding banks that facilitate the exchange of crypto transactions, the new tax may damp down interest in digital assets, said Emeka Ezike, the vice president of Stakeholders in Blockchain Technology Association of Nigeria (SiBAN).
He insisted that taxation without a long-term plan will “dwarf” the potential contribution to the country’s struggling economy.
“But the opportunity here is that the federal government recognized the sector, and that gives it a running ground to negotiate with policymakers for a more friendly process to ensure the market thrives,” Ezike said.
A cloudy future
As Nigeria navigates the complex landscape of digital asset taxation and blockchain technology, the future remains uncertain, yet filled with potential.
In May 2023, Nigeria launched a national policy that will drive its adoption of blockchain technology. Notably, the policy recognizes the legitimacy of cryptocurrencies and cryptocurrency exchanges despite reservations expressed by the CBN and SEC.
The document explains that the National Blockchain Policy will provide a “framework for the use of cryptocurrencies, among others, which can help to mitigate risks such as money laundering and fraud. This can help to build trust in cryptocurrency and make it more accessible to businesses and individuals in Nigeria.”
It hints at the possibility of the Nigerian government establishing standards for the listing and trading of cryptocurrencies on regulated exchanges in the country.
The SEC itself is pivoting towards tokenisation and plans to develop a pilot programme for a permissioned liquidity pool comprising tokenized bonds and deposits.
Still, authorities remain 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 stakeholders within the industry who are closely monitoring its impacts, challenges and opportunities.
While organizations like SiBAN acknowledge the significance of the tax policy, they recognise that it also signposts that the “government recognized the sector” which provides for an opportunity “to negotiate with policymakers for a more friendly process to ensure the market thrives.”