An Examination of the Current State and Future Directions
This paper by Learned Senior Advocate, Dr Olukayode Ajulo, provides an in-depth examination of the legal status of cryptocurrencies, their validity as legal tender, the current legal framework for taxing cryptocurrencies in Nigeria, the challenges faced, and the potential future directions for policymakers
Introduction
A cryptocurrency (also known as virtual currency), is a type of decentralised digital currency that investors can buy and sell along the blockchain. Unlike banknotes or minted coins that have tangible, physical forms, cryptocurrencies can only be accessed using computers and other electronic devices. While there are thousands of cryptocurrencies like Bitcoin, Ethereum, Binance coin, Dogecoin, etc., many with unique traits, they all tend to work in similar ways. The rapid growth and adoption of cryptocurrencies worldwide, have presented significant regulatory and taxation challenges for governments, including Nigeria. As one of the countries with a burgeoning cryptocurrency market, Nigeria has grappled with the task of developing a comprehensive legal and taxation framework, to address the unique aspects of this emerging asset class.
*Overview of the Current Legal Framework*
The legal framework for the taxation of cryptocurrencies in Nigeria is still evolving, as the Nigerian Government has not yet enacted specific legislation to address the taxation of cryptocurrency transactions. However, there are some existing laws and regulations that can be applied to the taxation of cryptocurrencies in Nigeria. Here’s an overview of the current legal framework:
1. Central Bank of Nigeria (CBN) Regulations: The Central Bank of Nigeria has issued several circulars and directives regarding the regulation of cryptocurrency activities in Nigeria. In 2021, the CBN prohibited banks and other financial institutions from facilitating cryptocurrency transactions. However, the CBN has not explicitly addressed the taxation of cryptocurrencies in its regulations.
2. Income Tax Laws: The relevant income tax laws in Nigeria, such as the Companies Income Tax Act (CITA) LFN 2004 and the Personal Income Tax Act (PITA) LFN, 2004, do not specifically mention cryptocurrencies. However, the Nigerian tax authorities can potentially consider cryptocurrency transactions as either business income or capital gains, depending on the nature of the transaction and the taxpayer’s activities.
3. Value Added Tax (VAT) Act: The Value Added Tax Act (CAP. V1 LFN, 2004) in Nigeria does not provide specific guidance on the VAT treatment of cryptocurrency transactions. The Nigerian tax authorities may consider applying VAT to certain cryptocurrency-related services, such as cryptocurrency exchange services or the sale of digital assets.
4. Regulatory Guidance: The Nigerian government, through the Federal Inland Revenue Service (FIRS) and the Securities and Exchange Commission (SEC), has issued some guidance on the taxation of cryptocurrencies. In 2019, the FIRS released a public notice stating that gains from cryptocurrency transactions should be subject to capital gains tax. The SEC has also provided guidance on the classification and regulation of certain cryptocurrency-based assets, which may have implications for their taxation.
It is however important to note that the legal framework for the taxation of cryptocurrencies in Nigeria is still evolving, and there may be additional developments or clarifications from the Nigerian government in the future. Taxpayers and businesses involved in cryptocurrency activities in Nigeria should stay informed about any updates or changes in the relevant laws and regulations.
*Legality and Legal Status of Cryptocurrencies in Nigeria*
Legal or Illegal?
There is no legislation in Nigeria that expressly bans the usage of cryptocurrencies. In normative systems such as law, without an express prohibition of a conduct (whether an act or omission) by a code, such a conduct is permitted. Its application in legal philosophy is that an action is permitted if it is not prohibited. In criminal law, this is known as the principle of nullum crimen sine lege (Latin, meaning “there is no crime where there is no law”).
When applied to legislation, it simply means that the existence of a crime depends on there being a previous legal provision declaring the action to be an offence. This is the jurisprudence behind the provision in Section 36(12) of the Constitution of the Federal Republic of Nigeria, 1999 (as amended) that“…a person shall not be convicted of a criminal offence unless that offence is defined and the penalty therefor is prescribed in a written law”.The courts have consistently upheld this principle (Aoko v. Fagbemi (1961) 1 All NLR 1; Amadi v. FRN [2011] All FWLR (Pt. 561) 1588). In the absence of a statutory prohibition of cryptocurrencies in Nigeria, their creation, use or dealing in them is lawful as they do not contravene any law in existence.
Legal or Non-Legal Tender?
Apart from the question of the legality of cryptocurrencies in Nigeria, another important consideration is whether they constitute legal tender. A legal tender refers to the money that is legally recognised in a defined jurisdiction as the means of exchange, i.e., acceptable for use to purchase goods or services and for settlement of debt or other obligations. Legal tenders take the forms of coins and banknotes (sometimes referred to as “currency”).
The Supreme Court in the case of Okpara v FRN (1977) while explaining the concept of a legal tender in contradistinction to a counterfeit held as follows:
“Counterfeit, in relation to a bank note or current coin of a kind which is legal tender in Nigeria, means a bank note or current coin made or issued other than by or by the authority of the Central Bank of Nigeria and in relation to a bank note or current coin of a kind which is not legal tender in Nigeria means a bank note or current coin made or issued other than by or by the authority of the body which, under the laws of the country in which the bank note or current coin is legal tender, is authorised to make or issue such bank note or current coin.” Per BELLO, J.S.C. (P. 7, paras. A-C)
Generally, the characteristics of a legal tender include:
a) regulation by a national government or regional formation;
[b) only a statutory authority is permitted by law to create legal tender, such as the national banks or mints;
c) the primary medium of exchange and people who trade within the jurisdiction are bound to accept it for the settlement of transactions; and
d) a unique name which identifies with a particular nation or region.
In Nigeria, the body empowered by law to issue legal tender is the CBN. Furthermore, the law also prescribes the unit of currency and its subdivision which is the Naira – further divisible into one hundred Kobo (CBN Act No. 7 of 2007, sections 2 and 15; Decimal Currency Act Cap. D2 Laws of the Federation of Nigeria (LFN) 2004, Section 1). According to Section 17 of the CBN Act:
“The Bank shall have the sole right of issuing currency notes and coins throughout Nigeria and neither the Federal Government nor any State Government or Local Government, other person or authority shall issue currency notes, bank notes or coins or any documents or tokens payable to bearer on demand being document or token which are likely to pass as legal tender”.
CBN also determines the exchange rate of the Naira to other currencies in the world, and arranges for the printing of currency notes and the minting of coins. Currency notes and coins issued by CBN, shall be legal tender in Nigeria at their face value for the payment of any amount.
These laws largely apply to Nigerian currency and where they make reference to foreign currency, they seem to envisage foreign fiat currency. In view of the foregoing, it is therefore, submitted that since cryptocurrencies are not issued by CBN they are not legal tender. Therefore, laws currently governing the CBN’s legal tender (Naira) may not be applied to cryptocurrencies, unless expressly revised to such.
*The Regulatory Landscape
Cryptocurrency Regulation in Nigeria*
Nigeria’s approach to cryptocurrency regulation has been cautious and evolving. The Central Bank of Nigeria (CBN) has issued several circulars and directives, aimed at limiting the use of cryptocurrencies in the country. In 2017, the CBN cautioned banks and other financial institutions against facilitating cryptocurrency transactions, citing the risks associated with their use.
In 2021, the CBN went a step further by ordering the closure of bank accounts belonging to entities or individuals involved in cryptocurrency transactions. This directive was met with criticism from the cryptocurrency community, who argued that it stifled innovation and financial inclusion in the country. Despite these regulatory actions, the legal status of cryptocurrencies in Nigeria remains ambiguous, as there is no comprehensive legislation specifically addressing their use and classification.
*Efforts Towards Regulation*
In recent years, there have been some efforts by the Nigerian Government to develop a more comprehensive regulatory framework for cryptocurrencies. In 2020, the Securities and Exchange Commission (SEC) of Nigeria released a set of regulations for digital assets and their service providers, which included guidelines for the issuance, exchange, and custody of cryptocurrencies.
However, the implementation and enforcement of these regulations have been limited, as the SEC’s authority over cryptocurrency activities has been challenged by the CBN’s directives. This regulatory uncertainty has created a significant barrier to the growth and adoption of cryptocurrencies in Nigeria. Nevertheless, when SEC published the SEC Rules on Issuance, Offering and Custody of Digital Assets in May, 2022, it was generally understood that the SEC Rules will apply to cryptocurrencies as either digital assets or virtual assets.
*Regulation of Cryptocurrencies in Other Selected Jurisdictions*
*European Union*
The European Court of Justice (ECJ) on 22 October, 2015 in the case of Skatteverket v David Hedqvist held that transactions to exchange a traditional currency for bitcoin and vice versa constitute the supply of services for consideration. It can be argued that although the case relates only to Bitcoin, the decision will apply to other cryptocurrencies.
The court also held in the case that such transactions are exempt from Value Added Tax (VAT) in the European Union. However, while it appears that the Directive as well as case law recognises virtual currencies as medium of exchange in the European Union, it is doubtful whether it can be considered legal tender as the Directive clearly states that “it is not necessarily attached to a fiat currency”. As such a person cannot legally be compelled to receive it in a transaction unless he is bound by any agreement to that effect.
*United States of America (USA)*
Just as in Nigeria, in the US, cryptocurrencies are not considered as legal tender but their use and dealing in them are legal. Laws governing virtual currency exchanges vary by state. At the federal level, authorities differ in their categorisation of cryptocurrencies. While the Financial Crimes Enforcement Network (FinCEN) since 2013 considers them to be mediums of exchange on the basis that tokens are “other value that substitutes for currency” under the Code of Federal Regulations, the Inland Revenue Services (IRS) by contrast, regards cryptocurrencies as property, and has issued tax guidance accordingly.
The US Securities and Exchange Commission (USSEC), considers cryptocurrencies to be securities while the Commodities Futures Trading Commission (CFTC) describes Bitcoin and cryptocurrency derivatives as commodities and allows them to be traded publicly. The Justice Department is collaborating with USSEC and CFTC to streamline regulatory oversight and ensure effective consumer protection.
*South Africa*
There is no specific law or regulation governing virtual currencies in South Africa. Virtual currencies (VC) are not legal tender in the country and “any merchant or beneficiary may refuse VCs as a means of payment”. South African Reserve Bank (SARB) warned of various risks associated with the use of virtual currencies, including issues relating to payment systems and payment service providers, price stability, money-laundering and terrorism financing, consumer risk, transactions on decentralised ledgers without an intermediary.
*Taxation of Cryptocurrencies*
The 1999 Constitution of the Federal Republic of Nigeria (as amended) makes no provision for a specific definition of tax. Rather, it provides for the distribution of taxing powers among the federal, state and local governments. However, tax has been statutorily defines in the National Tax Policy, 2107 as any compulsory payment to government imposed by law without direct benefit or return of value or a service whether it is called tax or not.
*The Current State of Cryptocurrency Taxation*
Nigeria’s existing tax laws do not explicitly address the taxation of cryptocurrencies. The applicable tax statutes, such as the Personal Income Tax Act and the Companies Income Tax Act, do not provide clear guidelines on how various cryptocurrency-related activities, such as trading, mining, and payments, should be taxed. As a result, there is a lack of clarity on the appropriate tax treatment of cryptocurrencies, which has led to several challenges:
1. Classification of Cryptocurrencies: The absence of a clear legal classification of cryptocurrencies (e.g., as currency, asset, or commodity) has made it difficult to determine the appropriate tax treatment.
2. Compliance and Enforcement: Without specific guidelines, taxpayers and cryptocurrency users face uncertainty in fulfilling their tax obligations, leading to potential non-compliance.
3. Revenue Generation: The government’s inability to effectively tax cryptocurrency-related activities may result in the loss of potential tax revenue.
4. Investor Uncertainty: The regulatory ambiguity surrounding cryptocurrency taxation may deter potential investors and hinder the growth of the cryptocurrency market in Nigeria.
Attempts at Addressing Cryptocurrency Taxation
The Nigerian government has made some attempts to address the taxation of cryptocurrencies, but these efforts have been limited in scope and impact. In 2020, the Federal Inland Revenue Service (FIRS), the country’s tax authority, issued a public notice acknowledging the existence of cryptocurrencies and stating that they should be taxed in accordance with existing tax laws. However, the notice lacked specific guidance on the applicable tax treatment and reporting requirements.
More recently, in 2022, the FIRS announced the establishment of a dedicated Cryptocurrency Tax Compliance Team to enhance the monitoring and taxation of cryptocurrency transactions in Nigeria. While this move was seen as a step in the right direction, the team’s specific mandate and the implementation of effective tax compliance measures remain unclear.
Challenges and Limitations
The lack of a comprehensive legal and taxation framework for cryptocurrencies in Nigeria has resulted in several challenges and limitations, including:
1. Regulatory Uncertainty: The ambiguous legal status of cryptocurrencies and the conflicting directives from different regulatory bodies have created an uncertain environment for cryptocurrency users and investors.
2. Tax Compliance and Enforcement: The absence of clear tax guidelines for cryptocurrencies has made it difficult for taxpayers to comply with their obligations, and for tax authorities to effectively enforce compliance.
3. Revenue Leakage: The government’s inability to effectively tax cryptocurrency-related activities have led to the potential loss of substantial tax revenue.
4. Hindered Market Development: The regulatory and taxation uncertainty surrounding cryptocurrencies may deter potential investors and hinder the growth and adoption of cryptocurrencies in Nigeria.
5. Lack of Clarity for Cryptocurrency Businesses: Cryptocurrency businesses, such as exchanges and service providers, face challenges in determining their tax obligations and structuring their operations accordingly.
*Future Directions: Towards a Comprehensive Legal and Taxation Framework*
To address the current limitations and challenges, the Nigerian government should consider the following future directions:
1. Enacting Comprehensive Cryptocurrency Legislation: The government should enact comprehensive legislation that clearly defines the legal status of cryptocurrencies and provides a clear regulatory framework for their use and taxation.
2. Establishing Clear Tax Policies: The government should issue clear guidelines on the classification of cryptocurrencies for tax purposes and the treatment of various cryptocurrency-related activities, such as trading, mining, and payments.
3. Improving Tax Administration and Enforcement: The government should strengthen the capacity of tax authorities, such as the FIRS, to effectively monitor and enforce cryptocurrency-related tax compliance, including the development of specialised expertise and the use of technological solutions.
4. Fostering Collaboration and Stakeholder Engagement: The government should actively engage with cryptocurrency industry stakeholders, including exchanges, developers, and users, to better understand the dynamics of the cryptocurrency market and incorporate their feedback in the policymaking process.
5. Exploring Innovative Taxation Approaches: The government should consider innovative taxation approaches, such as the introduction of a withholding tax on cryptocurrency transactions or the implementation of a digital asset registry, to enhance tax compliance and revenue generation.
6. Promoting Regulatory Clarity and Coordination: The government should ensure coordination between regulatory bodies, such as the CBN and the SEC, to provide clear and consistent guidelines on the regulation and taxation of cryptocurrencies.
7. Adopting a Balanced Approach: The government should strive to strike a balance between regulating cryptocurrencies to mitigate risks and fostering an environment that supports innovation and the growth of the cryptocurrency market in Nigeria.
*Conclusion*
The legal framework for taxing cryptocurrencies in Nigeria is currently in a state of flux, presenting both challenges and opportunities for policymakers and regulators. By developing a comprehensive legal and taxation framework, establishing clear policies, and fostering collaboration with industry stakeholders, the Nigerian government can create a more conducive environment for the growth of the cryptocurrency market while ensuring the appropriate taxation of related activities. This balanced approach will be crucial in navigating the evolving landscape of cryptocurrency taxation in Nigeria and optimising the potential benefits for the country’s economic development.
Dr Olukayode Ajulo, OON, SAN, FCIArb (UK), Attorney-General of Ondo State.
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