Kenya’s digital asset tax: death knell for crypto adoption?

The African cryptocurrency market in recent years has been growing in leaps and bounds. While the market volume remains one of the smallest in the world, Africa ranks as one of the fastest-growing crypto markets globally. Some African countries have seen these crypto activities more than others, but arguably none more than Kenya. 

However, the Kenyan government’s approach to cryptocurrency has raised questions about its objectives. In regulating crypto, the Kenyan legislature proposed three different taxes for cryptocurrencies and their service providers earlier this year. 

On September 1, the new Digital Assets Tax (DAT), an amendment to Kenya’s Financial Act 2023, came into effect. This regulation imposes a 3% tax on income from transferring or exchanging digital assets. 

DAT at a glance 

The new amendment stipulates that centralized exchanges operating in the country should act as tax collectors and deduct the 3% tax whenever their users exchange or transfer any of their assets. After making the deductions, they have a 5-day window to remit these taxes to the Kenyan Revenue Authority. The tax is to be deducted from the total value of the exchanged asset regardless of profit or loss. 

BAK’s legal tussle 

The introduction of the DAT has not gone down smoothly with players in the Kenyan crypto sector. Last week, the Blockchain Association of Kenya (BAK) announced that it was suing the Kenyan government over the DAT law, which it describes as ‘harsh.’ In a conversation with Mariblock, BAK’s legal, regulatory and policy affairs director, S. A. Kakai, discussed the organization’s petition and the implications for crypto in Kenya. Kakai justified BAK’s resort to legal action by highlighting several vital concerns, including how the tax would be calculated.  

Kakai suggests that centralized exchanges such as Binance and Yellow Card could be the most hit by the DAT. It could lead users to shift from centralized exchanges to decentralized ones beyond the reach of Kenyan government monitoring. 

 He said:
“The government will end up focusing [the implementation of DAT] on centralized exchanges, and that will lead to a situation whereby traders run away ... from centralized exchanges to decentralized exchanges, and the government cannot crack down and trace these decentralized exchanges. And even if they did, what would compel a decentralized exchange somewhere in the edge of the world to listen to the Kenyan Revenue Authority?” 

He cited that a few unnamed exchanges he spoke to are already considering shutting down operations in Kenya and moving elsewhere due to the increasingly stringent rules affecting their business. 

Centralized exchanges’ position 

Mariblock contacted global exchange Binance for their perspective on new tax regulations and their potential impact on operations in the country. A spokesperson responded that the DAT’s design could require exchanges to use their funds for payment. This is because of the short timeframes for tax remittances and the fact that users often don’t have enough fiat currency to pay their taxes promptly. 

“The tax’s design may force platforms to use their own funds to pay it, making it more expensive than the commissions charged by Binance. The tax also comes with a tight 5-day deadline for remittance, which is challenging for platforms to meet. Additionally, since users often lack fiat funds when the tax is due, Binance may need to use its own money for payments. 

“There are further complications, as the Central Bank of Kenya has advised local banks not to engage with crypto-related firms,” the spokesperson said.  

The company drew a parallel between India’s and Indonesia’s DAT and tax rates, where crypto taxes were set at 1% and 0.1%, respectively. According to Binance, introducing a similar tax in Indonesia saw a 60% drop in trading volumes of local crypto exchanges. This could mean users migrated to decentralized offshore exchanges or reduced cryptocurrency trading.  

Chris Maurice, CEO of the pan-African exchange Yellow Card, told Mariblock that the Kenyan government imposing taxes before regulating crypto would only further strengthen the informal market. Consequently, the Kenyan Revenue Authority stands to lose more tax revenue as users turn to unregulated and offshore exchanges, posing risks to the security of Kenyan funds.  

Maurice said: 

“There’s already a big informal market in Kenya, and it is regulation like this that drives the informal market. This encourages Kenyans to continue to trade informally, to continue to flaunt KYC [Know Your Customer] and anti-money laundering laws and regulations, to continue to not report crimes ... because it drives it underground.”