The Finance Bill, 2022- Legal and Policy Considerations for the Taxation of Crypto-assets in Nigeria
December 28, 2022, the National Assembly passed the Finance Bill, 2022 (‘the Bill’). The Bill, which is awaiting presidential assent, seeks inter alia, to provide fiscal support for the implementation of the 2023 Budget.
The Bill seeks to amend the Capital Gains Tax Act; the Customs, Excise, Tariff, Etc. (Consolidation) Act; the Personal Income Tax Act, the Companies Income Tax Act; the Petroleum Profits Tax Act; the Stamp Duties Act; the Value Added Tax Act; the Public Procurement Act and the Corrupt Practices and other Related Offences Act.
However, we shall limit our discourse to the amendment of Section 3(a)of the Capital Gains Tax Act.
Section 3(a) of the Capital Gains Tax Act (CGTA)
The Bill seeks to amend Section 3(a) of the CGTA by expanding the definition of ‘chargeable assets’ to include ‘digital assets’ to wit-
‘Subject to any exceptions provided by this Act, all forms of property shall be assets for the purposes of this Act, whether situated in Nigeria or not, including-
(b) Options, debts, digital assets and incorporeal property generally’.
The implication of the proposed amendment is that any gains on the disposal or sale of digital assets, including cryptocurrencies and other crypto-assets, are subject to capital gains tax (CGT) under the CGTA at the rate of 10%.
According to the FG, the purpose of the amendment is to clarify the basis for the taxation of Cryptocurrency and other Digital Assets with a view to enhancing cross-border and international taxation.
The taxation of digital assets is nothing new. Through the amendment, the FG seeks to join countries like the United Kingdom, the United States of America, Australia, India, Kenya, South Africa etc. in taxing digital assets. In December 29, 2022, Italy’s Senate approved its budget for 2023 which included a 26% CGT on crypto-assets trading over €2000.
This stance of the FG, whilst welcome considering the tax gains made by other countries imposing tax on digital assets, is surprising. This is because the FG’s approach to the treatment of cryptocurrency in Nigeria has been rather conservative.
The Legal and Regulatory Treatment of Cryptocurrency in Nigeria
In January 2017, the Central Bank of Nigeria and the Securities and Exchange Commission issued separate notices advising Nigerians, Banks and other Financial Institutions to desist from the trading and use of cryptocurrencies as they are not recognised as legal tender nor financial/investment instruments in Nigeria.
The CBN, again on February 28, 2018 issued another circular on the inherent risks in engaging in cryptocurrency transactions on the basis that cryptocurrencies are not regulated all over the world.
In 2020, the SEC backtracked by indicating that it would regulate crypto-tokens or crypto-coin investments provided that such transactions qualified as ‘securities transactions’ under the SEC Rules.
On the flip side, the CBN took a drastic turn by prohibiting deposit money banks, non-banking financial institutions and other financial institutions (normally referred to as ‘Regulated Entities’) from dealing in cryptocurrencies or facilitating payment for cryptocurrencies. The CBN further required Regulated Entities to identify and close the accounts of persons/entities transacting or operating crypto exchanges in Nigeria. Nonetheless, the SEC, in May 2022, published its Rules on the Issuance, Offering and Custody of Digital Assets.
Despite the uncertainty in the regulatory sphere vis-a-vis crypto-assets and the CBN’s conservative stance on cryptocurrencies, it is estimated that 22 million Nigerians (over 10% of the population) own cryptocurrencies and 35% of Nigerian adults invest in crypto-assets. This can be blamed on a number of Nigerians preferring to store value and trade in digital assets.
Thus, the FG’s conservative stance has resulted in lost potential revenue from the taxation of cryptocurrencies and the trading in digital assets. Hence, the Finance Bill, 2022 is effectively an effort by the FG to correct this oversight.
Legal implications of the Amendment
By including digital assets as ‘chargeable assets’ under the CGTA, it seems that the FG is treating ‘digital assets’ as ‘commodities’ or ‘properties’. Thus, any profit on a disposal and/or sale of that ‘commodity’ or ‘property’ will be taxed as a capital gain.
This characterization of digital assets as ‘commodity’ has significant ramifications for the tax treatment of profits or gains and losses from dealing with such digital assets. This is because as property, whenever you purchase something with your cryptocurrency, your spending will incur capital gains tax in the event that the amount you spent has increased in value compared to its original purchase price.
For example-if you purchase N100 worth of BTC and hold it till it rises to N1000 in value, if the N1000 is spent, the gain of N900 on that original N100 , will incur CGT at the rate of 10%. Thus, the profit on the initial N100 purchase of BTC would be taxable.
Capital Gains Tax
CGT is the tax you pay on a capital gain from the sale of a capital asset. The capital gain (or loss) is the difference between the price the capital asset was sold/disposed for (capital proceeds) and the price the capital asset was purchased/bought for (cost base).
Capital Gain = Capital Proceed — Cost Base
What are Digital Assets?
The Bill failed to define what it considers a ‘digital asset’ for tax purposes. Undoubtedly, digital assets are complex. However, understanding the nature of the ‘digital asset’ and the manner in which it is used, is important in defining what the digital asset is for tax purposes. If the digital asset falls outside certain parameters, the way it is used could unintentionally cause it to be treated as capital gains on a property or income from the ordinary course of business.
Digital Assets are often defined as; ‘a digital representation of value or rights which can be transferred and stored electronically, using distributed ledger technology or similar technology’.
Many transactions involve the disposal of digital assets. The disposal may give rise to a CGT Event where there will be some CGT payable to the FG. Some of the issues which the Tax Authority might have to contend with in defining ‘digital assets’ for tax purposes include-
- Crypto to Crypto Transactions
It is common for crypto connoisseurs to trade one cryptocurrency for another, often in the course of investment or capital acquisition. If you dispose of one cryptocurrency to acquire another cryptocurrency, you dispose of one property and acquire another property.
Will exchanging one cryptocurrency for another (e.g. Bitcoin for Ethereum) be considered a CGT event?
- Investing in Cryptocurrency or Converting to a Fiat Currency
It is common to exchange cryptocurrency for a Fiat Currency (E.g. Naira, USD, Sterling or Euro), often at a profit. If you acquire cryptocurrency as an investment, you might make a capital gain at the disposal of the cryptocurrency.
Will the FG consider this a CGT event?
- Non-Fungible Tokens (NFTs)
With regards to NFTs, the following activities are possible:
- Selling NFTs in exchange for cryptocurrency
- Exchanging one NFT for another NFT, or fungible cryptocurrency
- Giving an NFT as a gift
Will NFTs be treated as CGT assets, and if so, will these activities trigger a CGT event?
- Taxes on Yield Income from Stablecoins
“Stablecoin” is used to describe cryptocurrencies that have their value pegged to an underlying asset. The purpose of stablecoins is to afford users the benefits of cryptocurrency without exposing them to as much risk of volatility. It is common for stablecoins to be pegged to a fiat currency, such as Tether (USDT) which is fixed to the US Dollar.
Despite the relationship between these cryptocurrencies and fiat currencies, for taxation purposes, they are considered to be the same as any other cryptocurrency.
Thus, will you have to pay CGT on a capital gain made from your disposal of the stablecoin?
- Loaning Your Cryptocurrency
Digital assets can be loaned, either to an individual or a lending protocol. Depending on the particular situation, the loan may be considered a disposal of the asset and therefore, subject to CGT. This is because, depending on the terms and conditions of the loan, you may not retain ownership of the asset during the term of the loan. Because your ownership ceases at the time of the loan, will you be required to pay CGT on any capital gains on the loan?
However, there is another element to this situation: any interest made from the loan, may be treated as income for tax purposes and subject to income tax.
- Moving Cryptocurrency to an Exchange
Crypto users sometimes move cryptocurrencies between exchanges.
However, it is important to carefully read the terms and conditions of each exchange to figure out whether by moving your cryptocurrency to another exchange, the exchange acquires ownership over the asset or whether they simply negotiate on your behalf.
This distinction is important because moving your cryptocurrency to an exchange that acquires ownership over the asset may constitute a disposal for CGT purposes.
However, if the exchange simply negotiates on your behalf, you maintain ownership of the cryptocurrency and thus, moving the cryptocurrency to the exchange may not constitute a disposal.
- Transferring Cryptocurrency Between Wallets
Transferring cryptocurrency between wallets you own may not be considered a taxable event. This action is comparable to transferring Naira between two bank accounts.
However, if you transfer cryptocurrency from your wallet to another wallet not owned by you and you received something in exchange for the transfer, the transfer may be considered a disposal for capital gain and a CGT event.
If you have not received anything for this transfer (i.e. you transferred the cryptocurrency as a gift), you may still have to pay CGT.
Afterthoughts…
There are other activities such as ‘Staking’, Airdrop’, ‘Forking’ and ‘Chain Splits’, Initial Coin Offering, DeFi, Wrapped Tokens, earning cryptocurrency as wages, receiving a digital asset as a gift etc, which the tax authorities will have to decide whether or not and when such activities give rise to a CGT event.
Whatever, the tax authorities in Nigeria decide, there is clearly a need for tax guidance from the FIRS to resolve these questions. However, this is clearly the time for holders and users of digital assets in Nigeria to keep track of their crypto transaction to aid them and the tax regulators in determining their CGT liabilities.
Staking- when you ‘lock up your cryptocurrency for a set period of time to help support the operation and security of a blockchain in exchange for earning more cryptocurrency. This is the crypto equivalent of earning interest, dividend or passive income.
Airdrop- a marketing stunt that involves sending coins, tokens or digital assets to active wallet addresses for free or in return for a small promotional service.
Chain Splits or Forks- occurs when a community makes a change to the blockchain’s protocols producing a second blockchain. The two blockchains share the same history but are headed off in different directions. When the Chain Split occurs, holders of the base coin are often awarded some quantity of the new coin.
Wrapped Tokens- when a crypto token is pegged to the value of another cryptocurrency. The original asset is ‘wrapped' into a digital vault that allows the wrapped version-a newly minted token- to be created on another blockchain.
