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Nigeria, Africa’s largest Web3 economy, is moving swiftly to tax cryptocurrency transactions, driven by the need to generate revenue and exert more control over the burgeoning crypto market. The country, with its large population of tech-savvy youth and widespread use of cryptocurrencies, stands at the forefront of digital asset adoption in Africa.

Nigeria’s Federal Inland Revenue Service (FIRS) plans to present a bill for taxing the crypto industry for approval by parliament by September this year. Zacch Adedeji, executive chairman of the tax collection agency, revealed the plan at a meeting with the National Assembly’s Senate and House Committee on Finances. “The plan first is to have the law that regulates it, and that is why you see that we are here with the legislature, which will be the base of charging,” Adedeji said.

One of the key provisions in the proposed tax law is the introduction of a 7.5% value-added tax (VAT) on cryptocurrency transactions. However, the Nigerian government’s approach to taxing crypto transactions reflects broader concerns about economic stability, regulatory oversight, and fiscal pressures.

While the Central Bank of Nigeria maintains its cautious approach, it has issued guidelines allowing licensed fintech companies and banks to provide payment services for digital currency exchanges. This signals a potential thaw in the relationship between regulators and the crypto industry. The Nigerian Finance Act 2023 (pdf) further solidified crypto’s presence by imposing a 10% capital gains tax on crypto transactions.

But Nigeria has been grappling with significant economic challenges, including a shrinking oil revenue base, rising debt levels, and a widening fiscal deficit. The COVID-19 pandemic exacerbated these issues, pushing the government to seek alternative revenue sources. Cryptocurrencies, with their rapid growth and increasing market capitalization, have become an attractive target for taxation.

Now, the Nigerian government, under the leadership of President Bola Tinubu, has recognized the potential of crypto taxes as a means to shore up public finances. With the country facing mounting pressure to finance public services and infrastructure, taxing digital assets offers a new revenue stream. This urgency is further heightened by the country’s need to diversify its economy away from oil dependency, as fluctuating oil prices have proven unreliable for long-term economic stability.

Regulating a booming market

Nigeria’s crypto market has seen explosive growth in recent years, with millions of Nigerians participating in digital asset trading, remittances, and investments. A September 2023 report by Chainalysis, a prominent blockchain research firm, revealed that Nigeria’s crypto transaction volume grew by 9% year-over-year, reaching $56.7 billion between July 2022 and June 2023. This impressive growth rate outpaces that of other major African crypto markets like South Africa, Kenya, Mauritius, Ghana and Tanzania.

Paxful, a peer-to-peer crypto exchange platform, consistently reports Nigeria as its top African market. As of October 2023, Nigeria accounted for over 60% of Paxful’s trading volume in Africa, further highlighting its dominance. Nigeria has one of the highest cryptocurrency trading volumes in Africa, with young people making up a significant portion of the traders. According to a CoinMarketCap 2020 report on cryptocurrency adoption Nigeria recorded 210.6% growth in young crypto users.

Nigeria boasts a young and tech-savvy population which enjoys a high smartphone penetration rate. Nigerian aged between 18 and 34 constitute 26.6% of the population. For a current population of 226.7 million people, that translates to 60.3 million youths, which is higher than the entire populations of many countries. Even so, the median age in Nigeria is 17.2 years compared to a continental median age of 19 years. This means Nigeria will keep dominating Africa’s crypto scene in coming decades.

Despite this, the market has largely operated in a regulatory grey area, raising concerns about money laundering, fraud, and other illicit activities. By imposing taxes on crypto transactions, the Nigerian government aims to bring more transparency and accountability to the sector.

The move to tax crypto is part of a broader effort to regulate the market and ensure that it complies with existing financial laws. This regulatory push is seen as necessary to protect consumers and maintain financial stability in the face of the rapid proliferation of digital assets.

Nigeria’s approach to crypto taxation is also influenced by the need to strike a balance between fostering innovation and maintaining control over the financial system. The government acknowledges the potential benefits of blockchain technology and cryptocurrencies in promoting financial inclusion, particularly for the unbanked population. However, there is also a clear desire to ensure that these innovations do not undermine the authority of the state or lead to economic instability.

The decision to tax crypto transactions can be seen as an attempt to integrate the sector into the formal economy while retaining oversight. By bringing crypto into the tax net, the government hopes to legitimize the market, encourage compliance, and ultimately benefit from the economic opportunities that digital assets present. However, this approach has also sparked concerns about stifling innovation and driving crypto activities further underground.

To capitalize on blockchain’s potential and improve uptake, the government published its National Blockchain Policy last year, aimed at integrating blockchain technology into various sectors of the economy. If executed effectively, this plan could significantly reshape Nigeria’s digital landscape. However, crypto taxation is not covered in the document.

Impact on crypto users and businesses

For individual traders and investors, the new tax regime could lead to increased costs and complexity in managing their portfolios. The government’s decision to tax crypto transactions at the point of sale, transfer, or exchange could also result in a reduction in trading volumes, as users seek to avoid the tax burden.

For businesses operating in the crypto space, the new tax measures may necessitate changes in their operations, including the need to implement tax compliance systems and reporting mechanisms. Startups and exchanges may face higher operational costs, which could be passed on to consumers. There is also the risk that some businesses may relocate to more crypto-friendly jurisdictions if the tax environment becomes too burdensome.

The Nigerian public’s reaction to the government’s plan to tax crypto transactions has been mixed. While some see it as a necessary step to regulate the market and generate much-needed revenue, others view it as an overreach that could stifle the growth of the crypto industry. Critics argue that the tax could drive crypto activities underground, making it harder for the government to monitor and control the market.

Despite these concerns, the Nigerian government appears committed to moving forward with its crypto tax plans. The success of this initiative will depend on the government’s ability to implement the tax in a way that is fair, transparent, and efficient. It will also require ongoing dialogue with stakeholders in the crypto community to ensure that the tax does not unduly harm the industry’s growth potential.