Since cryptocurrencies are not recognized as legal currencies by the
CBK, dealings with them may not be regarded as financial services. FILE
PHOTO | NMG
Digital technology has emerged as one of the major disruptors in
the 21st Century. This has been occasioned by the ubiquitous
developments in information technology.
One of the
major innovations that has hit the world by storm is cryptocurrencies.
It is generally defined as a digital asset/currency that is used as a
medium of exchange.
Bitcoin is the most popular
virtual currency. In Kenya, these currencies are not recognised by
Central Bank of Kenya (CBK) as a legal tender. This however, does not
necessarily exclude them from taxation.
Currently, Kenyan tax law does not have a specific framework dealing with the taxation of cryptocurrencies.
That notwithstanding, income derived from dealing with these
currencies fall within the scope of taxable income under the Income Tax
Act.
The CBK has repeatedly warned the public against
dealing with cryptocurrencies citing the lack of a regulatory framework.
Could we thus deem this as income from illegal sources?
The
lack of a regulatory framework or support from the CBK should not be
construed to imply that dealing with cryptocurrencies is illegal.
Granted, income derived from unregulated activities is still subject to
tax in Kenya.
Mining cryptocurrencies has also become a
familiar phenomenon. This is the process of generating new
cryptocurrencies. The debate as to whether mining is an economic
activity for VAT purposes has been rife world over.
This
is because of the weak linkage between any services provided and any
consideration received for it to qualify as an economic activity for VAT
purposes.
Cryptocurrencies such as bitcoins can be
obtained through mining or purchase. Mining is a system that allows
computer users to calculate complex algorithms required to verify each
transaction in the block chain and be rewarded with a cryptocurrency.
Alternatively,
the cryptocurrencies can be purchased in exchange for real world
currencies such a dollars or euros. Bitcoin may be held as an investment
or used to pay for goods or services at merchants where it is accepted.
Thus,
mining and trading of a cryptocurrency is a business whose profits are
subject to income tax. The miner would need to report the profits.
Expenses which are wholly and exclusively incurred in generating the income would be deductible for tax purposes.
Since
cryptocurrencies are not recognized as legal currencies by the CBK,
dealings with them may not be regarded as financial services.
If
they are deemed as intangible assets would gains derived from the
buying and selling of the cryptocurrencies be deemed to be of a capital
or revenue in nature?
The virtual nature of
cryptocurrencies operations has created loopholes which may lead to
losses of tax revenue. The government should clearly address taxation of
the digital economy in the new Income Tax Act.
Further,
complementary tax legislation should be amended to incorporate taxation
of the emerging digital technologies. With ambitious revenue collection
targets, the tax authorities will eventually catch up with players in
the digital economy.
Beth Muraya and Tonny Watuka, Tax specialists at EY
No comments :
Post a Comment