Introduction

The world like they say, has become a digital village. Processes have evolved following technological interventions; people have adapted to new ways of doing things. One of the ways people have changed how things are done is the advent of digital assets. Many years ago, assets were primarily held in the form of cash, securities, plant and equipment, land, buildings etc. Now, digital assets have brought a new dimension to asset classes and investments in general.

The Oxford Learners Dictionary defines a digital asset as an item of text or media in a digital format that includes the right to the asset. Investopedia also defines digital assets as anything that is created and stored digitally, is identifiable and discoverable and has or provides value. Some of these digital assets include cryptocurrencies, Non-Fungible Tokens (NFTs), Central Bank digital tokens, security tokens etc.

It is interesting to note that transactions in digital assets have gained global acceptance. Companies are beginning to accept digital assets as a payment option. Trading in cryptocurrencies has skyrocketed since the introduction of Bitcoin in 2009. Infact, Statista reports that in May 2021, trading in cryptocurrencies was worth over USD500billion.

Given the growing popularity of digital assets, governments around the world have tried to create a framework to tax this class of asset. This is especially as global revenue drive continue to increase.

In this article, we investigate how digital assets, with specific reference to cryptocurrencies are taxed in other economies and then specifically, Nigeria. This topic is specifically important because taxpayers need to be aware of the direction the global economy is moving in terms of tax policies around digital assets.

Taxation of cryptocurrencies in other jurisdictions

In analyzing the framework around the taxation of cryptocurrencies in other jurisdictions, it is important that we understand the following:

a. How crypto assets are viewed in each jurisdiction;

b. The applicable tax(es) on these crypto asset transactions;

c. The possibility or practicability of the tax/revenue authority tracking crypto transactions for effective tax administration purposes; and

d. The mode of assessment of the tax on these digital asset classes. That is, do taxpayers self-assess themselves to tax whenever they transact in digital assets and then pay the applicable tax to the tax authorities, or do the tax authorities assess the taxpayer and then raise a tax liability etc.

We have limited our analysis to the United Kingdom, South Africa and the United States of America.

1. The United Kingdom (UK)

a. How are cryptocurrencies viewed? An asset or a currency?

The UK views crypto assets as synonymous with other classes of assets such as shares/securities etc. They are not viewed as currencies. This guides how transactions involving this class of assets are taxed.

b. What are the applicable taxes?

Transactions in cryptocurrencies are presently liable to corporate tax or capital gains tax in the UK. The specific tax type depends on whether a taxpayer is deemed to be making an income or capital gain from such transactions.

A taxpayer is deemed to be making a capital gain on a crypto transaction and hence liable to capital gains tax when:

  • they sell or trade their crypto assets or
  • use their crypto assets to purchase goods and services or
  • gift their crypto assets to another party (apart from their spouse).

Do note that the scenarios above are not exhaustive and each crypto transaction may be treated on a case-by-case basis for tax purposes. Furthermore, there is a capital gains tax allowance of 12,300Pounds which every UK taxpayer is entitled to every year (The UK government has announced that this allowance will be cut in subsequent years). It is also, instructive to note that the UK government permits offset of capital losses against capital gains to the extent that those capital losses are registered with Her Majesty's Revenue and Customs (HMRC).

Similarly, a taxpayer is deemed to be making an income from crypto transactions and hence liable to income tax when such individual gets paid in cryptocurrency for a service/good they supply. Also, when taxpayers mine cryptocurrencies, the rewards such taxpayer receives from such mining activity is liable to income tax. Do note that this list is also not exhaustive.

Finally, not all crypto transactions in the UK are liable to tax. Some crypto transactions are tax free. For instance, if you transfer crypto between your own wallets or you donate crypto to a charity or you gift your crypto asset to your spouse, such transactions are tax free.

c. Is the UK able to track crypto transactions?

The UK through HMRC can track crypto transactions. The HMRC has a data sharing arrangement with UK exchanges and this arrangement somewhat enables the HMRC view crypto transactions in such exchanges.

d. How are the taxes assessed?

In the United Kingdom, taxpayers typically file taxes on crypto transactions as part of a self-assessment tax return. Taxpayers can either file this through the Government's gateway service or via paper forms. The HMRC may review the correctness or otherwise of this tax return against the information it has obtained on the taxpayer from exchanges etc.

2. South Africa

Taxation of cryptocurrencies in South Africa is very similar to that in the United Kingdom. We have provided details below:

a. How are cryptocurrencies viewed? An asset or a currency?

Cryptocurrencies are not viewed as "currencies" for tax purposes in South Africa. Instead, the South African Revenue Service (SARS) views cryptocurrencies as "assets of an intangible nature".

b. What are the applicable taxes?

Just like in the UK, crypto assets are liable to either income tax or capital gains tax depending on how such assets are transacted. Generally, when you are deemed to be trading in crypto assets, for example, you buy and sell crypto assets over a short period of time, the income from such trade is liable to income tax. There may be other indices the SARS may employ to determine if the income from your crypto transactions is liable to income tax. However, if you are deemed an investor in crypto assets, for example, you buy and hold crypto assets over a relatively long period, then the gain from the disposal of such assets is liable to capital gains tax.

Furthermore, not all crypto transactions are liable to tax in South Africa. For example, transferring crypto assets between your own wallets or holding crypto assets is tax neutral in South Africa.

c. Is South Africa able to track these crypto assets?

The South African tax authorities have general powers to request financial data from third-party service providers. Therefore, information domiciled with South African exchanges can be requested by the South African Tax authorities.

d. How are the taxes assessed?

Similar to the United Kingdom, taxpayers also self-assess themselves to tax on crypto transactions and submit the returns as well as pay the applicable taxes to the SARS. There is an electronic filing portal wherein taxpayers may file their taxes, including crypto taxes. The SARS may also verify the correctness or otherwise of the self-assessment returns filed by the taxpayer.

3 United States of America

a. How are cryptocurrencies viewed? An asset or a currency?

For tax purposes, the Internal Revenue Service (IRS) views cryptocurrencies as "property". Therefore, the general tax principles applicable to "property" transactions in the US also apply to transactions involving digital assets.

b What are the applicable taxes?

Transactions involving digital assets are either liable to income tax or capital gains tax. Crypto transactions liable to capital gains tax include but are not limited to:

  • Trading one cryptocurrency for another
  • Paying for goods and services with cryptocurrencies
  • Selling crypto for fiat currency

The applicable capital gains tax on the gain associated with crypto transactions is dependent on how long the taxpayer has held the crypto asset and how much the taxpayer earns. If a taxpayer holds crypto assets for less than a year, such taxpayer will pay short term capital gains tax rate. This rate ranges from 10% to 37% depending on how much such taxpayer earns. However, if a taxpayer holds a crypto asset for more than a year, such taxpayer will pay long-term capital gains tax rate. This is much lower than the short-term rate and ranges from 0% to 20%.

It is instructive to note that capital losses are also deductible against capital gains earned on crypto transactions.

On the other hand, where a taxpayer is deemed to have earned income from crypto transactions, such taxpayer, is liable to income tax. These activities include but are not limited to; receiving payment in cryptocurrencies for goods or services supplied, receiving crypto rewards from mining activities etc.

Finally, like the other jurisdictions investigated, not all crypto transactions are taxable in the US, some are tax neutral. For example, moving crypto assets between your own wallets, holding crypto, buying crypto with fiat currency etc. are all tax neutral.

c. Is the US able to track these crypto assets?

Yes, the IRS is able to track crypto transactions through centralized crypto exchanges, that share customer data - including wallet addresses and personal data - with the IRS. Also, the IRS requires taxpayers to maintain appropriate documentation sufficient to establish the tax positions taken by taxpayers in their tax returns. This information includes records documenting receipts, sales, exchanges, or other dispositions of virtual currencies etc.

d. How are the taxes assessed?

The US like the UK and South Africa, operates a self-reporting mechanism, where individuals that engage in any transactions involving digital assets during the year must report all income related to their digital asset transactions. Taxpayers can either file online or using paper forms.

The Nigerian situation

a. Regulatory framework

Taxation of cryptocurrencies in Nigeria is still a grey area. This is because the regulatory framework around this class of assets presently requires some bit of clarity. For instance, in February 2021, the Central Bank of Nigeria (CBN) released a circular where it prohibited crypto trading and payment facilitation in Nigeria. However, the Securities and Exchange Commission (SEC or "the Commission") on May 11th, 2022, released a set of regulations guiding the issuance, exchange and custody of digital assets in Nigeria. According to the SEC, offering and sale of digital tokens considered a security should be registered with the Commission. The purpose of this registration is to ensure that such investment activity is not injurious to investors or violates any laws implemented by the Commission.

Therefore, while on the one hand, the CBN has not lifted the ban on crypto trading, especially through banks in Nigeria, the SEC seems to be more liberal with crypto investments registered with the Commission. It, therefore, remains to be seen if the CBN will issue another clarification circular following the guidelines issued by the SEC.

b. Taxation of crypto assets

The Companies Income Tax Act subjects "any source of annual profits or gains" earned by a company to Companies Income Tax. Similarly, the Personal Income Tax Act subjects "any profit, gain or other payment." earned by an individual, partnership etc. to personal income tax. In another vein, the Capital Gains Tax Act subjects every gain (except expressly exempted) earned by a taxpayer to CGT. The CGTA further provides that incorporeal property (where digital assets may fall) is an asset class liable to Capital Gains Tax upon disposal.

From the above, it is evident that transactions in cryptocurrencies are currently in scope of the Nigerian tax laws, albeit not expressly stated. Therefore, in line with the Nigerian tax framework, taxpayers are required to self-assess themselves to tax and remit the applicable tax(es) on all income they have earned (including income from cryptocurrency transactions) to the Nigerian tax authorities. It may not be surprising to find that in Nigeria, voluntary tax compliance with respect to income earned from crypto transactions is largely suboptimal. If that is indeed the case, then the reasons for this may not be far-fetched.

First, the regulatory framework around crypto assets is still unclear. Taxpayers cannot or are not inclined to remit taxes on an income line that the government (the CBN) has frowned upon. Secondly, the tax framework around this class of asset still requires some bit of refinement. Pertinent questions like the ones listed below need to be clearly addressed:

  • What is the applicable tax on transactions involving crypto assets? That is, will these assets be liable to income tax or capital gains tax?
  • Timelines for remittance of the applicable tax and other salient issues around tax compliance
  • In what currency will the tax on the crypto transaction be remitted? Typically, taxes in Nigeria are remitted in the currency of the underlining transaction. Therefore, if a taxpayer for example earns income in Bitcoins, in what currency will he make the tax remittance? This is especially because the Nigerian tax authorities have not publicized platforms or wallets for receiving crypto payments.
  • For the purpose of efficient tax administration and tax audit purposes, how will these assets be tracked?

It is instructive to note that the Government through the recently publicized Finance Bill of 2022 (although this Bill has not been signed by the President as at the time of this publication) introduced the term "digital assets" among the list of assets liable to CGT upon disposal, to provide direction on the taxation of crypto transactions. However, given that the extant laws already bring transactions in digital assets into the scope of Nigerian taxation, what may be more appropriate to ensure proper taxation and collection of the tax on digital assets are:

  1. Clarity on the regulatory framework of digital assets. The CBN, SEC and other relevant stakeholders need to adequately address the regulatory framework around crypto assets. This includes but not limited to the legality or otherwise, of trading in crypto transactions in Nigeria.
  1. Information Exchange. The FIRS as well as the State Boards of Internal Revenue Service (SBIRS) should be able to retrieve taxpayers' crypto transactions domiciled with exchanges in Nigeria. This will help during tax audit exercises. This is similar to what is applicable in other jurisdictions discussed in this article.

It is important to note that the FIRS has been granted the powers under the FIRS Establishment Act (as amended by Finance Act 2021) to deploy technology to taxpayer's systems for information gathering purposes. However, the State Boards have not been granted similar powers. This is an area subsequent amendment to the laws can address or alternatively, an information sharing arrangement between the SBIRS and the information exchanges can also address this.

  1. The FIRS, SBIRS, the Federal Ministry of Finance and other relevant stakeholders may collaborate to design and publish a framework (by way of a regulation) to effectively tax and collect the tax on crypto transactions. This regulation should properly document the applicable taxes (income tax or capital gains tax) on crypto transactions and instances where these taxes (income or capital gains tax) may arise. Recourse can be made to how other jurisdictions tax these crypto transactions. Please refer to our discussions above.
  1. The regulation discussed in (2) above should also properly highlight the collection points of the tax on crypto transactions. Will the self-assessment mechanism currently operational in Nigeria be effective to collect the tax on these transactions especially because a lot of the taxpayers who transact in cryptocurrencies are individuals? Perhaps, crypto exchanges can serve as tax collection agents of the government. For example, for transactions wherein the taxpayer will need to pay income tax on crypto transactions, the exchange can deduct WHT at source from the income of the taxpayer and then remit same to the relevant tax authority.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.