Understanding cryptocurrency and the law backing its various endeavors is very important. Some crypto activities are taxable while some are not taxable.
You’ll need to know the rules & regulations laid down by your country’s regulators regarding crypto and taxes. This will help you to avoid being behind the bars for your earnings and profits in crypto.
In this post, we’ll learn about the various law backing cryptocurrency and taxes. The law governing crypto tax in Nigeria will be our focus.
Understanding Cryptocurrency & Tax
The first cryptocurrency, Bitcoin, was introduced in 2009 as a peer-to-peer cash system. It was designed to be easy to use, easy to store, and anonymous. Your virtual wallet and the Bitcoins in it were as untraceable as the contents of a numbered Swiss bank account.
It wasn’t long before governments observed a surge in money laundering using cryptocurrency. Tax authorities, too, were bound to take note that invisible wealth is difficult or impossible to tax.
Today, most cryptocurrency transactions are transparent. Cryptocurrency exchanges impose anti-money laundering requirements on Bitcoin traders. This is to avoid drawing the ire of regulators and tax officials.
Regulators, central bankers, and federal judges all continue to have different opinions on whether cryptocurrency should be considered a currency or a commodity. Nevertheless, all seem to agree that the profits acquired through trading and using it should be taxed.
How is Crypto Taxed?
If cryptocurrency is sold or exchanged at a profit, that profit is taxable at the capital gains rate. There are situations where cryptocurrency can be taxed or not. The various crypto endeavors like mining, staking & lending, NFTs, Airdrop, DeFi and so on can either be taxed or not.
Taxable events that may lead to crypto being taxed include exchanging cryptocurrency for fiat currency, paying for goods or services, such as using Bitcoin profits to buy a car, and other events.
Crypto activities may be taxed or not taxed depending on a country’s regulatory body. Cryptocurrency is yet to be adopted by the government of several nations but rules and regulations have been put in place in this regard.
Which Taxes Apply to Crypto in Nigeria?
The rules and regulations guiding cryptocurrency in Nigeria is made by the Nigerian Securities and Exchange Commission (SEC). The regulatory body states in 2020 ruling that digital assets are by default securities, unless proven not to be by the issuer.
Under its rules, crypto assets fall into four categories and depending on the classification, are subject to different taxes. Non-fiat virtual currencies are commodities and so are utility tokens that have no security characteristics.
Tokens that represent physical underlying assets, shares in companies, dividends or any of the characteristics traditional securities have are deemed securities. Derivatives (LPs, ETF tokens, leveraged ones etc.) are classified as investments.
Crypto Activities & Government Ruling
Listed below are crypto activities and the government’s ruling about taxes (taxable or non taxable) in Nigeria today.
1. Crypto Trading
When it comes to trading crypto to crypto, there is no specific coverage of any laws or regulations that say it is a taxable event. However, if crypto assets are liquidated, they are subject to tax.
If the crypto you sold is classified as a commodity, the income tax rules are applied. In the case of a security classification, the capital gains tax kicks in. The taxable amount is the difference between the buying and the selling values.
2. Crypto Mining
There is no particular ruling covering crypto mining in Nigeria. The results of mining can be put into consideration in this regard.
If the mining is of a security coin, the rewards can be seen as dividends, but with the cryptos not being tender in the eyes of the Nigerian SEC, the rewards are not income per se.
Similarly, if a commodity coin is being used to generate a commodity through mining, those rewards are not taxable either.
As it is with mining, so it is with staking. The results of staking crypto can be considered first before knowing if it is taxable or not.
If staking a security coin, the rewards can be seen as dividends. If a commodity coin is staked, those rewards are not taxable.
4. DeFi and Airdrops
For DeFi and airdrops, token classification by the country’s SEC must be consulted first. Interest or earnings from decentralised finance (DeFi) may or may not be seen through the same lens as mining and staking. Airdrops, on the other hand, can come under the classification of gifts.
The sale of any DeFi profits or airdrops will be subject to tax on the complete value of the tokens (capital gains for securities and income for commodity tokens).
5. Non-Fungible Tokens (NFTs)
The exact nature of the underlying asset of non-fungible tokens (NFTs) will define the security or commodity nature of these unique tokens. NFTs that represent real physical underlying assets or earning streams are also securities in the eyes of the authorities.
So if you buy or sell NFTs that, let’s say represent physical art, it’s a security and capital gains taxes apply. In the case of an NFT not representing a physical asset but creating a revenue stream such as royalties, the original NFT can be said to be a security token too.
How Much Do You Have to Pay for Crypto Tax in Nigeria?
Nigeria has a flat 10% capital gains tax (CGT) so you can simply do the maths and find out how much you have to pay as CGT.
Income tax is a different story, with six different brackets that have different percentages. Your overall income determines which bracket you fall within and how much tax you have to pay:
- The first NGN 300,000 is taxed at 7%.
- The next NGN 300,000 is taxed at 11%.
- The next NGN 500,000 is taxed at 15%.
- The next NGN 500,000 is taxed at 19%.
- The next NGN 1,600,000 is taxed at 21%.
- Anything above NGN 3,200,000 is taxed at 24%.
SEC allow you to adjust for expenses you incur when selling commodities and securities such as commissions and other fees, so you can take that into account.
Losses made from sales can also be claimed, but only in their own category. Capital losses can only be deducted against capital and not income, for example.
There may be instances that you have to pay VAT, or if you have regular employment and your employer cuts taxes at source, you can avoid double taxing with proper documentary proof.
There may be issues with determining if tokens are securities or not. The solution here would be to get in touch with a crypto tax expert on how to go about classifying your token sales.
Understanding cryptocurrency and tax is important if you are dealing in cryptocurrency to earn and make profit. The rules and regulation governing cryptocurrency is different in nations. You need to know this to avoid the repercussions of owing crypto tax.
Also Read– How to Identify Crypto Scams in 2022
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