The Kenya Revenue Authority (KRA) will integrate a new revenue system with cryptocurrency exchanges and marketplaces to track and record all transactions in real-time, the taxman has revealed.
This is part of a strategy to nab tax dodgers in the largely secretive market segment, which criminals can also exploit to support illicit activity such as thefts, fraud, and money laundering.
Cryptocurrency is a digital payment system that doesn’t rely on banks to verify transactions and enables participants worldwide to send and receive payments.
Trading can be done through traditional online brokers or cryptocurrency exchanges that charge asset-based fees.
The taxman estimated that between 2021 and 2022, Kenya’s cryptocurrency market transacted about Sh2.4 trillion—representing close to 20 percent of the country’s GDP.
“With this potential, it has become increasingly important for the KRA to develop a system to track and collect taxes on cryptocurrency transactions,” KRA said, noting that it is procuring a new digital tax system to cover crypto trading.
“Though the sector remains unregulated by reporting authorities i.e. CBK (Central Bank of Kenya) and CMA (Capital Markets Authority), the earnings from the sector are legally taxable as per Section 3 of the Income Tax Act. The lack of a robust system to collect taxes on cryptocurrency transactions has resulted in a significant loss of revenue for the government” it said.
KRA said that the anonymity of cryptocurrency transactions has made it challenging to identify and track taxpayers engaged in cryptocurrency transactions, forcing the agency to directly monitor transactions on the trading platforms and exchanges.
“The system shall integrate with cryptocurrency exchanges and marketplaces to track and record cryptocurrency transactions. It shall capture transaction details, including transaction date, time, type, and value” the taxman said in a brief of its targeted new tax system.
Kenyan investors buy cryptocurrencies to preserve their savings, carry out international transactions either for individual remittances for those working in places like Europe and North America or for commercial use, such as purchasing goods to import and sell, says Chainalysis.
The payment of imports through cryptocurrency is seen as convenient and quick because the traders no longer have to buy dollars using Kenya shilling or fork out fees to money transfer firms like Western Union.
Besides speeds, it has the advantage of the irreversibility of digital asset transactions.
KRA said the planned system will calculate taxes owed based on cryptocurrency transactions, assess duties owed based on Kenya’s tax laws and regulations and generate tax statements and notices to taxpayers.
“The goal is to have a robust and efficient system that will enable the KRA to collect taxes on cryptocurrency transactions effectively and efficiently” KRA added.
A parliamentary committee late last year backed a Bill that aims to allow the taxation of more than four million Kenya engaged in crypto trading.
The Finance and National Planning Committee approved the publication of the Capital Markets (Amendment) Bill 2023, paving its way to the second and third readings where MPs would give their input and forward it to the President for assent if approved by the House.
The committee chaired by Molo MP Kimani Kuria approved the proposal in the Bill by Mosop legislator Abraham Kirwa to amend the Capital Markets Act, Cap 485 to include digital currencies in the definition of securities.
The Capital Markets (Amendment) Bill 2023 seeks to introduce the taxation of crypto exchanges and digital wallets and imposes transaction taxes akin to excise duty charged on bank transactions. The Bill wants crypto traders to pay KRA capital gains for the market value of the assets.
The proposed amendment provides for specific provisions to govern the digital currency transaction in Kenya, its creation through crypto mining, regulation around the trading of digital currencies, provide for its taxation, and ownership, and provide for promotion of innovation in the sector.
KRA is battling to meet its revenue targets amid subdued economic performance.
The taxman missed its target for the full year ended June by Sh267 billion, hurt by reduced corporate profits and job cuts in a period when businesses were distressed by the depreciation of the shilling and high energy prices.
The cryptocurrency market remains a big focus globally despite concerns by investors, exchange hosts, and regulatory agencies.
For example, cryptocurrency prices plunged in 2022 after a series of collapses at top crypto firms, including FTX, left investors with large losses.
Exchanges on their part are concerned about a lack of uniform regulatory standards, market volatility, and the potential for cybersecurity risks relating to crypto assets.
