Cryptocurrencies as we all know it, is a new form of money; digital money. This is different from the fiat or paper based money we currently use.
Cryptocurrencies became popular in 2009 when Satoshi Nakamoto invented the first blockchain-based cryptocurrency; Bitcoin. After that, a lot of cryptocurrencies have surfaced, some of which are Ethereum, Ripple, Litecoin, etc.
Permit me to save the conversation on the crypto technology for a later date. In this article, my interest is the potential tax footprints that may arise as a result of transacting in cryptocurrencies. For the purpose of this article, I will be looking at Bitcoins.
At the time of writing this article, there is no framework for taxing Bitcoin transactions in Nigeria. This means that most transactions involving Bitcoins go under the tax radar. However, given the growth in cryptocurrencies and the government’s drive for revenue generation especially as it pertains the digital economy, it may not be surprising to see the government introduce rules around taxing transactions involving Bitcoins.
Transactions in Bitcoins may have potential tax implications in the future. The tax footprints may exist in the following areas:
a. Mining Bitcoins
Miners are people who help you record your transaction on the blockchain after solving a mathematical problem. They get incentivized for helping record this transaction. Think of it this way, if you withdraw money from a bank, the bank will charge you transaction cost for helping record your transaction on a ledger and maintaining this ledger with the bank. Miners are like banks; they get paid for their services in the form of Bitcoins.
b. Trading in Bitcoins
Just like stocks are trading on the stock exchanges, bitcoins are traded on cryptocurrency exchanges. With Bitcoins, you can pay for goods or devices from vendors who are willing to accept Bitcoin as a means of payment. Some of the benefits of paying with Bitcoins compared to other means of payments is that, with Bitcoins, third party transaction costs are greatly reduced, and transactions can be consummated faster than the traditional payment methods.
Before I move into what I think the tax implications may be for transactions in Bitcoins, may I mention here that in 2014, the United States through the Internal Revenue Service (IRS) issued a notice 2014-21 on the tax implications of trading with cryptocurrencies. According to the publication, cryptocurrencies are seen as properties and not currencies. This implies that, all taxes applicable to properties will also be applicable to Bitcoins. For example, capital gains tax will now arise on transactions consummated using Bitcoins.
Take the example below:
John purchased Bitcoins worth $1000 today and then sells it for $2500 in 6 months. Capital gains tax will apply on the capital gain of $(2500-1000) = $1500 arising from such transaction.
As at today, the likely taxes that may arise on trading in Bitcoins (Assuming Bitcoins is seen as a currency by the revenue authorities) in Nigeria is capital gains tax. As the enabling act (The Capital Gains Tax Act) provides that “any currency other than a Nigerian currency” shall be a chargeable asset for which capital gains tax may be applicable. This means that in my example above, John may have to pay capital gains tax at 10% on the capital gains of $1500 on his transaction.
Assume in my example that John is a data miner who earned Bitcoins worth $1000 from his mining activity, John may have income tax liability as a result of this activity. The market value of the bitcoins ($1000) will constitute his taxable income upon which income taxes will be charged.
In South Africa, cryptocurrencies are seen as assets of an intangible nature and gains from sale of such cryptocurrencies are subject to capital gains tax. Also, in the UK, disposal of a cryptocurrency is subject to Capital Gains Tax. Given this, it may not be surprising to see Nigeria adopt the same approach in taxing crypto transactions in the country as its foreign counterparts. Should Nigeria adopt the United States' definition of cryptocurrency as a property, it may be likely that other types of taxes asides the ones already considered may apply such as value added taxes.
If you have any comments or contributions, please feel free to drop same in the comment section and I will be happy to learn from you.
Written by Nnamdi Obinwa, ACA