During the recent IMF Summit and G20 Summit held in Morocco, participating countries placed significant emphasis on establishing clear regulatory frameworks for digital assets. This shift in approach towards the regulation and taxation of virtual assets has garnered openness from many African countries, including Kenya.

However, the fast-paced nature of innovation often surpasses the ability of governments to keep up, occasionally resulting in missteps. Presently, Kenya finds itself in such a situation, being home to over 4 million users and ranked as the fifth-fastest growing crypto market in 2022. As blockchain companies venture into new markets, it becomes crucial for them to navigate the complex landscape of tax regulations. While digital assets are now recognized as a form of property that is subject to taxation in many countries, including Kenya, the government's implementation of these tax regulations has faced scrutiny.

The Blockchain Association of Kenya has filed a petition contesting the legality of the Digital Asset Tax (DAT) scheduled to be implemented on September 1, 2023. The DAT, introduced through the Finance Act 2023, imposes a 3% tax on the total value of any transaction or trade involving digital assets such as cryptocurrencies, NFTs, loyalty points, e-tickets, and other valuable assets. The association, with a mission to protect the interests of Kenya's private cryptocurrency users, has taken the matter to court. The association argues that the tax should be based on net gains and profits, rather than the gross value of assets.

“This is an income tax, the basic principle of income tax is that tax ought to be on gains and profits net, not on the gross value of assets. That argument has been tried and tested before and it has successfully obtained favorable judgments before the High Court of Kenya,” said Allan Kakai, BAK’s legal, regulatory, and policy affairs director in an interview with NODO.

Kakai also raised concerns regarding how the Digital Asset Tax (DAT) defines transfer events. According to him, the current definition of transfer events is problematic. For example, even if someone is simply transferring digital assets from one wallet to another, whether as a gift or for personal use, the government still imposes a 3% tax on that transfer. This broad interpretation of transfer events places an unnecessary burden on individuals and businesses alike.

Enforcement of compliance on both centralized and decentralized platforms raises concerns under the new regulations. The government's intention to tax both centralized platforms, such as Binance and Yellow Card, and decentralized platforms like Uniswap and PancakeSwap poses different challenges. While taxing centralized platforms may be relatively straightforward, Allan Kakai, the legal, regulatory, and policy affairs director of the Blockchain Association of Kenya (BAK), expressed his opinion that taxing decentralized platforms could prove more difficult. The decentralized nature of platforms like Uniswap and PancakeSwap makes it harder for the government to track and impose taxes on transactions carried out on these platforms.

“Our petition aims to address concerns about the DAT’s impact on both our industry and the broader economy. Enforcement of this harsh DAT could potentially lead to adverse effects on the industry’s growth and innovation. The core focus of the petition is to thoroughly examine the legal and constitutional dimensions surrounding the imposition of this tax on digital assets,” a BAK statement reads.

Many businesses and individuals operating in Kenya's digital asset space are shifting their operations to jurisdictions with clearer tax laws, Kakai told NODO. This phenomenon, often referred to as "capital flight," involves moving assets and investments to countries with more favorable regulations. It poses a challenge for Kenya's government, as it may result in a loss of potential revenue and hinder the growth of the local digital asset industry.

According to Allan, members of the Blockchain Association of Kenya (BAK) are not opposed to paying taxes, as long as they are established on logical and fair principles. However, the current digital asset tax in Kenya is perceived as onerous and counterproductive, he emphasized.

The hearing for BAK's petition to the court has been rescheduled to the 20th of November, Allan told NODO.

The government is actively pursuing regulations that promote innovation and is engaging private stakeholders like the Blockchain Association of Kenya (BAK). One notable development is the conclusion of the World Coin hearings by the Parliamentary Ad Hoc Committee, which has resulted in detailed reports and recommendations, according to Kakai. “Notably, the committee instructed parliament to prepare a regulatory framework for virtual asset service providers within the next six months. The Blockchain Association of Kenya is taking a leading role in assisting with the development of this framework,” he said.

But Kenya is making a significant process in creating this very important and useful digital asset regulation. For many in Kenya’s growing crypto community, the Ad-Hoc committee’s report which is due in 6 months will be a giant leap forward to create clarity that will facilitate the subsequent handling of future tax-related matters. Allan said that the BAK is working closely with various government bodies including the Financial Regulation Commission, Capital Markets Authority, and Communication Authority to contribute to the creation of a robust regulatory framework.