Nigeria’s new crypto tax policies may not drive the revenue it needs

In February, the Nigerian government initiated legal action against Binance, claiming the cryptocurrency exchange owes over $81 billion in unpaid taxes. This lawsuit is part of a broader strategy to enhance tax revenues through new regulations aimed at the cryptocurrency sector. Despite the government’s ambitious projection of generating substantial tax revenue from crypto transactions, experts warn that achieving this goal may be fraught with challenges.

Nigeria ranks as the 53rd largest economy globally and is projected to have one of the highest average GDP growth rates between 2010 and 2050, according to Citigroup. However, recent years have seen the country’s economic development stall, prompting the government to implement significant tax reforms and wage structures. With over 22% of the population participating in the cryptocurrency market, Nigeria views the regulation of platforms like Binance as a critical strategy to boost its economy, particularly by capitalizing on unregulated cryptocurrency activities.

Despite the optimism, Nic Puckrin, founder of The Coin Bureau, cautions that the proposed cryptocurrency tax may not yield immediate results. He points out that Nigeria’s vibrant over-the-counter (OTC) trading market allows users to sidestep conventional financial avenues, particularly as many turn to cryptocurrency amidst the instability of the Nigerian Naira.

The Nigerian cryptocurrency market, the largest in Africa, is significant, with approximately 47 million users. Since the lifting of a previous national ban on digital currencies in 2021, the government has made strides to integrate cryptocurrencies into the financial system, notably through the Nigeria Securities and Exchange Commission’s (SEC) regulations framing digital assets as securities.

Recent legal actions against Binance reflect the government’s seriousness about harnessing revenue from crypto transactions. The government seeks compensation not just for unpaid taxes but also for alleged economic damage attributed to the exchange’s operations. Additionally, Nigeria’s 2023 National Blockchain Policy aims to embed blockchain technology into public services, emphasizing a commitment to modern financial solutions.

Maksym Sakharov, co-founder of WeFi, articulated the expectations for Nigeria’s regulatory landscape, underscoring the country’s unique position as a crypto leader within Africa. However, he highlighted Nigeria’s historical difficulties with implementing robust policies due to pervasive corruption.

The practicality of collecting taxes from a largely informal cryptocurrency economy remains a critical concern. Many Nigerian users rely on peer-to-peer (P2P) trading to escape the effects of currency devaluation and soaring inflation, with crypto transactions contributing significantly to the digital economy—18.4% of GDP in Q4 2023. This reliance on informal channels blunts potential tax revenues and raises questions about the government’s ability to enforce compliance effectively.

Nigeria’s tax system is notably underdeveloped, with a tax-to-GDP ratio stopping at 6%. The government’s reported collection of 10.1 trillion naira ($12.7 billion) in 2022 illustrates the overarching dependence on VAT and corporate taxes, with a mere 9% of the labor force contributing to income tax revenues.

As the government seeks to tap into the largely unreported income of the unbanked population and informal sectors—representing 65% of the GDP—the tax on cryptocurrency transactions stands as a contentious approach. Proposed rates of 0.5% to 1% on capital gains and a 10% VAT on exchanges underline the ambition to generate an estimated 200 billion naira ($250 million) annually.

However, excessive taxation could drive users toward unregulated P2P platforms and make compliance increasingly difficult. Commentators like Puckrin suggest that the government lacks the resources to enforce strict tax compliance effectively within Nigeria’s thriving P2P ecosystem.

The proposed crypto tax represents a broader effort to formalize both the digital and informal economies. The government’s success depends on striking a balance between regulatory enforcement and fostering an innovative financial environment. Embracing technologies like blockchain analytics could assist in tracking taxable transactions, as seen in India’s partnership with Chainalysis.

To combat structural inefficiencies and systemic corruption, Nigeria might consider digitizing its tax procedures and enhancing the mandate of the Economic and Financial Crimes Commission (EFCC) to minimize financial mismanagement.

In conclusion, while the initiative to tax cryptocurrency transactions could lead to raised revenue and enhanced financial inclusion, the Nigerian government must tread carefully to avoid stifling the burgeoning digital economy through stringent regulations. With calculated implementation and a focus on transparency, there lies potential for a revitalized relationship between the state and its growing crypto industry.