Crypto players withhold tax billions

Players in the cryptocurrency sector are withholding billions of shillings in taxes from the Kenya Revenue Authority (KRA) following a circular barring banks from dealing with the industry.

The Block Chain Association of Kenya told the National Assembly’s Finance committee that despite collecting taxes from its clients, the sector is yet to remit the three percent it has withheld from Kenyans selling digital assets.

The lobby told MPs that their decision not to remit taxes from more than four million Kenyans dealing in cryptocurrencies such as Bitcoin followed a Central Bank of Kenya (CBK) circular that barred banks from operating accounts for firms that deal in virtual assets.

Read: Crypto, NFTs tax signals Kenya’s softening stance

The CBK in December 2015 warned Kenyans on the use, holding and trading of virtual currencies such as Bitcoin in Kenya, arguing it is not a legal tender.

The banking sector regulator said Bitcoin is a form of un-regulated digital currency that is not issued or guaranteed by any government or central bank.

Alan Kakai, the association’s director for legal and policy affairs, said despite withholding the digital asset tax, it has not been possible to remit it to the KRA as the CBK barred them from operating bank accounts.

“We have withheld the tax since the digital asset tax (DAT) came into effect on September 1, 2023. The CBK told banks not to touch the Cryptocurrencies. The CBK blocked us from holding bank accounts,” said Mr Kakai. He however declined to disclose how much the industry was sitting on in collected but unremitted taxes.

“KRA has imposed a three percent tax on gross fair market value of the DAT that is to be remitted within five working days. But we have not remitted any money.”

The Finance Act, of 2023 introduced a three percent tax on the amount cryptocurrency holders earn from selling digital assets. The new tax also affects those trading in non-fungible tokens (NFTs).

“We want to be regulated and taxed. We want to be licensed to operate. The biggest challenge with crypto is to be understood,” Mr Kakai said.

He said his association wants MPs to scrap the DAT, arguing it was declared unconstitutional on the grounds that levying tax on Gross Fair Market Value means potentially taxing loss-making entities

“Scrap off DAT. Taxation of capital was ruled unconstitutional in the Kenya Revenue Authority vs Stanley Waweru and six others (Article 201(b) (1) of the Constitution of Kenya,” Mr Kakai said.

He said there are a number of ongoing court cases against the Finance Act that introduced the DAT.

Mr Kakai said close to Sh3 trillion has been transacted between July 2021 and June 2022 in Kenya.

Read: Bill sets up KRA tax dragnet for 4m cryptocurrency users

“We need to have enacted the Digital Assets Act by July next year. We may have Kenyans who have lost their money. It could also have been used as a conduit of money laundering,” Kuria Kimani, who chairs the National Assembly’s Finance Committee, said.

Digital asset, according to the Finance Act, is anything of value that is not tangible and cryptocurrencies, token code, number held in digital form and generated through cryptographics.

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