By: Lisa Atukunda Nyakato
This analytical brief examines the taxation policies and legal implications surrounding cryptocurrencies and blockchain technology. It provides an overview of the issues that the emergence of cryptocurrencies raises for tax implementation, focusing on the tax challenges associated with crypto assets themselves. It also highlights the need for policymakers to develop a thorough and coordinated regime to tax cryptocurrency and blockchain. This will elucidate the complexities and potential future directions in the taxation and legal treatment of cryptocurrencies and blockchain technology.
As the adoption of cryptocurrencies and blockchain technology continues to grow in Uganda and across Africa, there is a pressing need for regulatory bodies to develop clear guidelines and frameworks to govern the use of these technologies. The rapid evolution of digital currencies and the decentralized nature of blockchain technology have presented unique challenges for governments and policymakers who are struggling to keep pace with these innovations. The rise of cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), Binance Coin, Yellow Card and Tether among others has led to a need for policymakers to develop a comprehensive framework for taxation and regulation.
A blockchain is a digital ledger that records all transactions of a particular cryptocurrency. Organizations such as Blockchain Association of Uganda (BAU) promote such awareness of block chain and cryptocurrencies. The online courses and organized workshops are available to help and educate the different crypto currency trends, investment strategies and technological advancements.
Cryptocurrency runs on a distributed public blockchain. Transactions are digitally signed using cryptography. Buying cryptocurrency requires a reliable exchange to securing assets. Once a cryptocurrency is gotten, an account is created and registered and secured through a password. A fiat currency (UGX) is deposited into the exchange account using a debit card or through mobile money. A market order, limit order and stop order can then be made. Once a cryptocurrency has been purchased, then one can withdraw from the exchange to a personal wallet for better security. One has to keep track of all investments and market trends and keep informed about any news and developments about cryptocurrencies.
Cryptocurrency mining on the other hand is where new coins are verified and added to what is referred to as a blockchain. Cryptocurrency mining rewards are taxed as ordinary income when received, based on the fair market value. Cryptocurrency should be reported on the tax return which means recording any gain or loss of income received through cryptocurrency. If a person received any payment for any goods or services through cryptocurrencies, its then considered as income and is subject to tax.
When you sell cryptocurrency for a profit, you owe capital gains tax on the difference between your cost basis and the sale price. When you later sell or exchange the mined cryptocurrency, any increase in value is subject to capital gains tax. If you mine cryptocurrency as a business, you can generally deduct ordinary any business expenses.
In the European Union, cryptocurrencies are exempted from VAT when exchanged for fiat currency. However, Value Added Tax (VAT) may apply to goods or services purchased with crypto. Most European countries apply capital gains tax to crypto profits, with rates varying from 0-55% depending on the country and your income level. Some countries like Germany exempt gains on crypto held for over a year from tax. The EU has ruled that exchanging crypto for fiat currency is exempt from VAT, but using crypto to purchase goods/services may incur VAT. For instance, Portugal exempts individuals from paying capital gains tax on profits from selling or trading cryptocurrencies, as long as it is not considered a person’s main source of income.
In the United States, capital gains tax applies when selling or exchanging crypto that has increased in value since purchase and Mining rewards and receiving crypto as payment are taxed as ordinary income.
Across Africa, different countries have adopted varying approaches to regulating cryptocurrencies and blockchain technology. Some countries have embraced these technologies and have introduced favorable policies to encourage their use, while others have taken a more cautious approach due to concerns about money laundering, fraud, and other illegal activities.
Nigeria has recently introduced a 7.5% VAT on cryptocurrency transactions. This policy was implemented in July 2024, requiring cryptocurrency firms to charge VAT on all transactions conducted on their platforms. Whereas countries such as Nigeria have imposed taxes, South Africa has opted for an exemption. In South Africa, cryptocurrencies are classified as financial services under the VAT Act, which means that the supply of cryptocurrencies is exempt from VAT. Value-Added Tax Act in 2018 recognizes cryptocurrencies as financial instruments instead.
One of the key challenges for regulators in Africa is the lack of harmonized regulatory frameworks across the continent. This has resulted in a patchwork of regulations that can be confusing and difficult to navigate for businesses and individuals operating in multiple countries.
Some countries have comprehensive laws governing cryptocurrencies, while others rely on existing financial regulations. While there is productivity from engaging cryptocurrency and blockchain technology, there are quite a few challenges that can be faced that include:
- There is a challenge in detecting and preventing cryptocurrency tax evasion. Cryptocurrency transactions usually occur pseudonymously, meaning individuals can conduct transactions without revealing their real identities. This makes it difficult for tax authorities to link transactions to specific individuals.
- Many countries have not yet issued clear guidance on the sales tax treatment of cryptocurrencies. The lack of uniformity across jurisdictions creates challenges for businesses accepting crypto payments to determine the applicable sales tax.
- There are no avenues for governments to explore regulatory approaches to address tax evasion, money laundering, and consumer protection concerns.
- Ethical issues arise regarding tax evasion, use of cryptocurrencies in illicit activities, and environmental impacts of mining.
Therefore, regarding the above there is the need for governments to step in and create a thorough and coordinated regime to tax cryptocurrency and blockchain, as well as the importance of developing a comprehensive cryptocurrency income tax policy to address the fiscal risks associated with the proliferation of cryptocurrencies. There is need for participation in industry with regulatory bodies to provide input on cryptocurrency regulations and to advocate for clear and fair tax treatment that supports innovation while addressing regulatory concerns.
There is a need for policymakers to work closely with industry stakeholders to develop clear and effective regulations that strike a balance between fostering innovation and protecting consumers and investors.
Government also needs to create and enforce laws specifically targeting cryptocurrencies and any fintech related activities. This includes regulations that mandate reporting of cryptocurrency transactions for tax purposes, fraud purposes and imposed anti-money laundering requirements on cryptocurrency exchanges, and establish consumer protection measures for any affected party. As interest in cryptocurrencies continues to grow, understanding their underlying technology and navigating the system responsibly are key.
The Writer is a Programme Associate at DEI
