How to Invest in Bitcoin and Cryptocurrencies in Kenya
Kenyans are engaged in trading and investing in Cryptocurrencies across the world. Are the gains in these transactions taxable in Kenya?
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(Photo by Waka)
In recent years there has been a proliferation of digital currencies or cryptocurrencies across the world.
The most famous cryptocurrency is Bitcoin which increased in price between 2010 to November 2017 to almost US 8,000 dollars.
Other cryptocurrencies though not as famous as Bitcoin but gaining momentum are Ethereum which increased in price by almost 2500% in 2017 and Filecoin.
What are cryptocurrencies?
Cryptocurrencies are tradable digital currencies.
They are bought on the internet and sold on the internet.
They are virtual currencies. Bitcoins are the most famous cryptocurrencies.
After buying the cryptocurrency, one is assigned a secret key as evidence of ownership.
The owner is expected to take great care of the secret key because once lost, the key is not replaceable. The danger is that whoever gets hold of the key gains control of the currency.
Bitcoins were introduced into the markets in 2009 and began trading in 2010. The currency is supposed to have been created by Satoshi Nakamoto since he had authored a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008.
The creator remains a mystery up to now.
However, it is understood that only 21 million Bitcoins will be introduced into the world.
Currently, 19 million Bitcoins have been released.
Transactions with Bitcoins
Bitcoins are used as a medium of exchange in replacement of money. Currently, many transactions are carried out using Bitcoins.
Some big corporations such as Microsoft and PayPay accept payments with Bitcoins.
However, many other organizations do not accept transactions using Bitcoins. However, the uptake of the currency as a form of worldwide exchange is slower than was envisaged thus transforming the virtual currency into an investment asset.
Cryptocurrencies as assets
Cryptocurrencies are traded (sold and bought) at the Coinbase Exchange, a digital exchange in the US which is the largest digital coin exchange.
Many people are engaged in the business of cryptocurrencies as traders or investors. Traders buy and sell for short term gain and realize the gains immediately.
The investors buy and hold the investment hoping to gain in the long-term price appreciation.
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The investors realize the gains after selling their investments. This means that the sellers will either gain or lose on the value depending on whether there is a price increase or decrease.
The increase in the value is an investments gain which is taxable in many countries.
The currency platform allows conversion of the digital currency to US dollars and any other acceptable currency.
Gains are only realized after the asset is sold. Many traders and investors prefer to use or re-invest their realized gains.
The realized gains will either be used to buy trading merchandise, other digital assets or procure services on the internet.
Alternatively, the money may be remitted to the trader or assets seller.
The money may be remitted through banks, credit cards, debit cards or PayPal. This means that for each transaction, there is a gain and evidence of the transactions.
Taxation case between IRS and Coinbase Exchange
Internal Revenues Services (IRS) is the body taxed with collecting federal taxes in the US. In the recent past, IRS went to court seeking access to Coinbase Exchange database to investigate probable tax evasions by US taxpayers.
This situation was occasioned by the fact that there were reports of more than 500,000 participating accounts at the Coinbase Exchange yet less than 900 persons reported their cryptocurrency transactions for taxation purposes for the period 2013 to 2015.
Currently, Coinbase Exchange has more than 12.2 million users from more than 32 countries.
The Judge is expected to allow IRS access to accounts of those US persons who made gains during the period 2013 to 2015 for taxation purposes.
What is the implication of this? Simple, there will be taxes raised as long are the gains were realized. The affected persons will pay the taxes and any penalties that may be levied.
This is because in the US like in many countries across the world, gains are only taxed once they are realized.
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Because of the matching principle in income tax, and expenses may be allowed and loses on the transactions recognized.
Taxation of cryptocurrencies profits and gains in Kenya
Closer home, in the recent past, many Kenyans are engaged in trading in cryptocurrencies, Bitcoin is the most famous.
According to the Income Tax Act, Kenyans must report on their worldwide income.
This means that any profits and gains from trading or investing in any cryptocurrency Bitcoins included must be reported as part of the income for that particular year of income that the gains are realized. Tax and pay tax.
But can Bitcoins be used as currency in Kenya to pay tax?
No! Taxes in Kenya are paid using Kenya shillings. Any time the profits and gains are realized in a currency that can be converted into Kenyan shillings the tax can be paid.
Also, taxes in Kenya are on accrual bases. In cases where the profits and gains are recognized, then tax will be due.
The recent move by the Central Bank of Kenya (CBK) to allow KRA access to person’s bank details will enable KRA access taxpayer’s bank accounts and link personal Identification Number (PIN) to the bank accounts.
This effectively means that details of any receipts and payments to and from the bank accounts will be transmitted to KRA.
Availability of information about the cryptocurrencies transactions will be the trigger for queries by KRA.
The payments include foreign payments for example payments through PayPay will be available to the tax authority. This will not be a first for us because it has happened elsewhere in the world.
Recently in Canada, PayPay received a court order requiring the provision of information of all receipt and payment transactions by Canadian business account holders in PayPal to Canadian Revenue Authority (CRA) during the between 2014 to November 2017.
Soon, KRA will have access to this type of information about Kenyans.
Way forward for Kenyans
What happens in the world eventually happens at home. It is important to always remember that Kenyans are liable for tax on their worldwide income.
Therefore, whatever transactions that Kenyans engage in globally, they will have to be reported in Kenya and tax paid in Kenya.
For income tax purposes, the matching principle is used in determining the profits that are subject to tax. Hence, all expenses incurred towards the particular gains must be recorded. Therefore, the taxpayer should maintain a record of both the gains and the expenses towards those gains.
On realizing the gains, the taxpayer should establish the tax due and remit it to KRA when due.
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Failure to pay the tax will result in late payment penalties (among other penalties) and interest.
Feel free to send us questions or topics on tax and investments in Kenya that you would wish to be covered in this Website.
This post is for general overview and guidance and does not in any way amount to professional advice.
Hence, www.taxkenya.com, its owner or associates do not take any responsibility for results of any action taken on the basis of the information in this post or for any errors or omissions. Kenyan taxpayers must always rely on the most current information from KRA.
Tax industry in Kenya is very dynamic.
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