Many people do not know about the relationship between trading and investing in currencies and taxation, yet they trade all over the world. The question is: are the gains from these transactions taxable in Kenya? In this article, we will attempt to answer this question. 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 from 2010 to November 2017 to almost 8,000 dollars.
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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. Since Satoshi Nakamoto published a paper in 2008 titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” it is believed that he is the creator of the currency.
The creator has remained a mystery up until 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 place of money. Currently, many transactions are carried out using Bitcoins. Some big corporations, such as Microsoft and PayPal, 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 that 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 from the long-term price appreciation. The investors realize their 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 value is an investment gain, which is taxable in many countries. The currency platform allows conversion of the digital currency to US dollars and any other acceptable currency.
Realized gains
Gains are only realized after the asset is sold. Many traders and investors prefer to use or reinvest their realized gains. The realized gains will either be used to buy trading merchandise, or other digital assets, or procure services on the internet.
Alternatively, the money may be remitted to the trader or asset 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 transaction.
Taxation case between IRS and Coinbase Exchange
The Internal Revenue Service (IRS) is the body charged with collecting federal taxes in the US. In the recent past, the IRS went to court seeking access to the Coinbase Exchange database to investigate probable tax evasions by US taxpayers.
Less than 900 people reported their cryptocurrency transactions for taxation purposes between 2013 and 2015 despite reports of more than 500,000 participating accounts at the Coinbase Exchange, which led to this situation. Currently, Coinbase Exchange has more than 12.2 million users from more than 32 countries.
The judge is expected to allow the IRS access to the accounts of those US persons who made gains during the period 2013–2015 for taxation purposes. What is the implication of this? Simple. There will be tax increases as long as the gains are realized. The affected person 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. Because of the matching principle in income tax, expenses may be allowed and losses on transactions recognized.
Taxation of cryptocurrency profits and gains in Kenya
Closer home, in the recent past, many Kenyans have 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, including Bitcoin, must be reported as part of the income for that particular year in which 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 Kenyan 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 an accrual basis. In cases where the profits and gains are recognized, tax will be due.
The recent move by the Central Bank of Kenya (CBK) to allow KRA access to a person’s bank details will enable KRA to access taxpayer’s bank accounts and link personal identification numbers (PINs) 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. The availability of information about the cryptocurrency transactions will be the trigger for queries by KRA.
The payments include foreign payments; for example, payments through PayPal 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 on all receipts and payment transactions by Canadian business account holders in PayPal to the Canadian Revenue Authority (CRA) during the period from 2014 to November 2017. Soon, KRA will have access to this type of information about Kenyans.
Ways 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 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 associated with those gains.
On realizing the gains, the taxpayer should establish the tax due and remit it to KRA when it is due. Failure to pay the tax will result in late payment penalties (among other penalties) and interest.
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Thank you for reading the article.
Dr. Wakaguyu Wa Kiburi.
