Crypto Tax Guide Nigeria

Crypto Tax Guide, Nigeria

Class reference

Introduction

According to UN Newspaper, “Financial institutions in Nigeria are currently banned from facilitating crypto transactions by the Central Bank of Nigeria. Despite this ban, Nigerians traded at least ₦497.35bn ($1.16bn) worth of Bitcoin between January 2021 to June 2022 and the percentage of  Nigerians who owned crypto  in 2021 was 6.3%.” According to the Nigerian crypto report released by KuCoin in April 2022, Crypto investors account for 35% of the Nigerian population.

With the above, Nigeria needed to redesign its capital controls to include flows channelled through cryptocurrencies and impose a financial tax on cryptocurrency trading and limiting the amount of individual transactions on crypto exchanges. For this reason, the SEC released recently, new regulations on the issuance, custody, and exchange of digital assets, as well as classify them as securities.

Cryptocurrency is generally classified as Property, but with the SEC’s Regulation, Nigeria classifies Cryptocurrency as Securities.

Given the fast-evolving nature of cryptocurrencies and their ecosystem, countries urgently need to agree and implement a global tax cryptocurrency regulation that considers the needs and challenges of developing countries and gives them adequate representation.

Though the tax regulation is yet to be released in Nigeria, it can be believed that Cryptocurrencies are seen as securities according to SEC.

Our platform Chainkeeping is built to ease the Cryptocurrency taxation process and calculation. It helps to compute the total gross inflows and outflows of an Individual or business’ crypto-transactions and compute tax liability while considering the applicable tax regulation.
ICON Our platform Chainkeeping is built to ease the Cryptocurrency taxation process and calculation. It helps to compute the total gross inflows and outflows of an Individual or business’ crypto-transactions and compute tax liability while considering the applicable tax regulation.

TAXATION OF CRYPTOCURRENCY IN NIGERIA

Classification of cryptocurrency

Cryptocurrency is classified as securities according to the SEC regulation released I April, 2022 and defines it as Digital Assets - a digital token that represents assets such as a debt or equity claim on the issuer;

Applicable taxes to cryptocurrency

Applicable taxes to cryptocurrency

Based on Nigeria’s ACTs, Securities are subject to 3 main taxes:

  1. Capital Gains Tax
  2. Income Tax
    • Personal Income Tax
    • Company Income Tax
  3. Withholding Tax

Capital Gains Tax

  • Based on CGT Act 2019: Securities are chargeable assets subject to CGT;
  • Rate: Flat rate of 10% on the chargeable gain (profit) on disposal, after deducting allowable expenses;
  • Threshold: N100 Million.
  • Filings of CGT for securities is done on annual basis;
  • Power to Collect CGT: for individuals, chargeable gains are collected by  the state internal revenue authorities, while FIRS collects that of companies.

Income Tax (Company Income Tax and Personal Income Tax)

  • Income derived by companies from bonds and shorter securities are subject to income tax effective 2nd January 2022;
  • The bonds and securities on which income tax is due effective 2nd January 2022 include - federal gov’t treasury bills and promissory notes, bonds issued by states and LGs, bonds issued by corporate bodies, and interest earned on bonds and short-term securities;
  • Exemption: Bonds issued by federal government;
  • Income tax filings are done annually.
  • Company Rates: 

    Turnover less than ₦25,000,000.00 @ 0% 0f Assessable Profit

    Higher of 20% 0f Assessable Profit, where Turnover is between ₦25,000,000.00 to ₦100,000,000.0030% 0f Assessable Profit, where Turnover is greater than ₦100,000,000.00.
    OR

    Minimum Tax – 0.5% of Gross Turnover above ₦25,000,000.00

  • Personal Income Tax rates: 
    • First ₦300,000.00 @ 7%
    • Next ₦300,000.00 @ 11%
    • Next ₦500,000.00 @ 15%
    • Next ₦500,000.00 @ 19%
    • Next ₦1,600,000.00 @ 21%
    • Above ₦3,200,000.00 @ 24%

Withholding Tax

  • WHT deduction applies to interest and other payments made to any company on account of income from bonds and other securities;
  • Rates: 10% and 5% on Company and Individuals respectively;
  • WHT returns are done monthly.

Taxable cryptocurrency income / transaction

Taxable cryptocurrency income / transaction

  • Sale of Cryptocurrency for cash
  • Trading one type of crypto for another (PNL)
  • Receipt of Cryptocurrency for goods sold or services rendered
  • Staking Rewards
  • Airdrops
  • Payment for goods or services
  • Miscellaneous Income – Airdrops, rewards from gaming, Inheritance
  • Net Capital Gains 
  • Gain from sale of crypto received as a gift
  • Gains from traded mining income
  • Mining Income
  • Gain from sale of mining Income
  • Gain from sale or trade of Airdrops
  • Gain from sale or trade of Staking Rewards
  • Inherited Crypto and Gain/loss from sale or trade of Inherited Crypto

Non-taxable cryptocurrency transactions

Non-taxable cryptocurrency transactions

Deductible cryptocurrencies for tax purpose

Deductible cryptocurrencies for tax purpose

  • Loss from sale or trade of Cryptocurrency carried forward
  • Cryptocurrency fees (Fees charged on crypto-transactions called Gas/Network fees)
  • P2P Fees
  • Trading fees

Other deductible expenses

Other deductible expenses

  • Internet Subscriptions
  • Mining Expenses
  • In-game expenses
  • Inheritance pursuance expenses

Determination of cryptocurrency gains or loss

Determination of cryptocurrency gains or loss

It is important to note that cryptocurrency inflows establish the cost basis for Cryptocurrencies, to enable the easy determination of gain or loss on same. Simply, in order to determine whether or not a gain or loss was realized on a cryptocurrency, there’s a need to determine a cost basis first.
ICON Cost basis is the acquisition cost of your cryptocurrency; this includes your purchase price, the value of other crypto given up in exchange for this crypto, or amount reported as income if the crypto was earned. To then ascertain the gain or loss, the following methods are used;
First In First Out (FIFO)
Last In First Out (LIFO)
Average Cost Method (ACM)
Specific Identification – Lowest Cost Method (LCM)
Specific Identification – Highest Cost Method (HCM)

How is cryptocurrency taxed?

How is cryptocurrency taxed?

Mr. Olayinka opened an account with Binance exchange on the 4th of November, 2021 and purchased bitcoin as seen below;
  • 4th Nov 2021, 1 Bitcoin @ $45,000.00
  • 29th Nov 2022, 1 Bitcoin @ $38,000.00
  • 20th Dec 2022, 1 Bitcoin @ $50,000.00
  • 31st Jan 2022, 1 Bitcoin @ $63,300.00
  • 1st Mar 2022, 1 Bitcoin @ $41,800.00

Mr. Olayinka decided to sell one of his Bitcoin on the 3rd of April, 2022 when the price of Bitcoin was $53,840.

Required: Compute Mr. Olayinka’s Cryptocurrency taxable income and tax liability on the sale of Bitcoin made on the 3rd of April, 2022, assuming a tax rate of 10%.

Solution:

Tax forms issued by cryptocurrency exchanges

Tax forms issued by cryptocurrency exchanges

ICON1099-MISC
This form provides information for a wide range of income payments such as crypto earnings, referral bonuses, and other income. If you received crypto earnings or bonuses, the 1099-MISC will be made available by the platform that issued the payments. You’re responsible for reporting the income on the tax authority’s tax forms when filing your tax return.
ICON1099-B
Forms 1099-B report cost basis when available. Gains reported on this are taxed pursuant to capital gains treatment if it meets the threshold, if not, it is treated as ordinary income.

Tax forms used by tax authority for tax filing

Tax forms used by tax authority for tax filing

Every taxpayer is expected to get relevant tax forms from the tax authority applicable to them and file their returns for the period.

Individuals are required to request for Personal Income Tax Returns Form, fill it, file and pay their taxes within six (6) months from the end of the government fiscal year and also apply for Tax Clearance Certificate. Their Cryptocurrency income is meant to be included in the other income from other sources column with an attachment of the tax report generated from the Taxwhales platform.

Corporate bodies are required to declare all their incomes in their financial statement, file same on the Company Income Tax Returns Form, remit their taxes and make an application for Tax Clearance Certificate to FIRS within six months from the end of their accounting period (Document attached). The realized income/loss should be recognized in the Statement of Profit or Loss while the Unrealized income/loss should be recognized in the Other comprehensive income section.

Withholding Tax - for both Corporate bodies and Individuals who trade cryptocurrency for others and pay returns (Like investment), Withholding Tax should be withheld and remitted to the FIRS on behalf of the Client. If Company – FIRS, If Individual – State Internal Revenue Service.

ICON The processing of taxes for Companies/Corporate bodies has been made seamless and is done on the Taxpro (https://taxpromax.firs.gov.ng/) Platform of the government. Only taxes relating to individuals are filed manually.

Reports issued by Chainkeeping for tax filing

Reports issued by Chainkeeping for tax filing

Our Platform, Chainkeeping provides both Individual and Corporates users with a comprehensive report – Tax Report – which details the wallet transactions within a particular period, the capital gains and other Incomes. The gains/losses in the report are certified by a Tax Professional who affirms to this report by signing on it. This report is to be attached with other document when filing taxes by the Taxpayer.

Tax optimization

Tax optimization

It is very important to understand the difference between a WASH SALE and Tax Optimization. Tax optimization refers to the usage and implementation of processes that can reduce an individual or company’s tax liabilities and charges to a minimum without violating tax laws. It can decrease it to a minimal value in a legal manner and without violating the tax laws by using the various regulations to advantage – simply put, it is Tax Avoidance.

A Wash sale however, is the sale of a stock at a loss and repurchase of the same or substantially identical stock within 30 days, for which the capital loss is disallowed for tax purposes. A crypto wash sale is the act of selling a Cryptocurrency at a loss and then buying the same security again shortly after. The Wash sale rules restrict an investor from deducting the loss on a security if repurchased within 30 days. Day traders may buy and sell the same stock frequently which can result in a wash sale. A wash sale is Tax Evasion.

Chainkeeping helps to optimize taxes of users.

Capital Gains Tax

The following are some of the reasons why tax optimization is important:

  1. Small firms and individuals may find it difficult to obtain funding from other sources. As a result, saving money on taxes is often their first line of defense.
  2. Tax optimization can result in more money in your pocket. At the end of each financial year, the lower the overall tax rate, the more money is available to reinvest or consider as profit.
  3. When looking for strategies to reduce their overall tax rates, private businesses should examine both the company's and the owner's perspectives. This means that it employs both corporate and individual tax-cutting techniques.

How Chainkeeping Helps in Cryptocurrency Tax Optimization?

Our tax optimization services help individuals and companies to maximize their income by helping them identify assets which can be sold at a loss and replacing it with the same or reasonably similar investment, then use the loss to offset any realized gains. This reduces value of realized gains, thereby, reducing tax liability of the Individual or Company.

Tax professionals

Tax professionals

Chainkeeping provides all users with the option of using a tax professional for all or one of the following services –

  • Connect all crypto-wallets and handle all tax issues
  • Handle other Tax issues
  • Certify Tax Reports
  • Ensure compliance with Tax regulations

How do tax authorities know about your cryptocurrency?

How do tax authorities know about your cryptocurrency?

Tax authorities such as the IRS, ATO, CRA, HMRC, and others use a variety of techniques to track cryptocurrency transactions and enforce tax compliance. For starters, the IRS has subpoenaed domestic and international cryptocurrency exchanges such as Coinbase and Bitstamp for user transaction information. This has lead to at least tens of thousands of cryptocurrency users’ transaction information being shared directly with the tax authorities.

In addition, tax authorities, like the IRS, use data analytics tools such as Chainanalysis and Palantir to pinpoint cryptocurrency users and tie their identity from a regulated cryptocurrency exchange to their off-exchange wallets and transactions (including multiple layers removed from the exchange).

The IRS and other tax authorities also partner and share data with other governmental bodies, academic institutions, and international governments to share information about cryptocurrency usage.

Penalty for non-payment and non-filing of crypto taxes

Penalty for non-payment and non-filing of crypto taxes

  • Fees
  • Penalties
  • Interest
  • Confiscated refunds
  • Audits
  • Jail time