20221121: Crypto & Derivative Taxes in Kenya

*From original post to coaching group with additional notes

GTZ Fx Trading

10 min readNov 22, 2022

Table of Content

Review of Capital Markets (Amendment) Bill, 2022

Take note of below new developments on taxes.

Bill sets up KRA tax dragnet for 4m cryptocurrency users

Bill sets up KRA tax dragnet for 4m cryptocurrency users The Kenya Revenue Authority (KRA) will go after the more than…

www.businessdailyafrica.com

A very unfortunate move.

The Capital Markets (Amendment) Bill, 2022 intends to do the following:

Taxation on crypto exchanges and digital wallets
Taxation like excise duty charged on bank transactions
Pay income tax if held for a period not exceeding twelve months
Pay capital gain tax if held for a period exceeding twelve months
Requires those who own or deal with digital currency to reveal their amount, cost of the transaction, type, date of purchase/sale of crypto, and profit/loss from the transaction for tax. They are also required to keep records of the same.
Define digital currencies, creation through crypto mining and regulation around trading with digital currencies
Define the responsibilities of people or business trading in digital currencies, taxation, ownership and promotion of innovation in this area
Define digital currency as a security and require users to seek a trading licence within 6 months of the bill’s passing.
Implement a centralised electronic register of all transactions in digital currencies

The article notes the following uses of crypto:

As an investment to get good returns
Savings preservation
International remittance
Purchasing goods to import or sell

Benefits are:

Transaction cost reduction
Manage Fx rate when buying USD

Risk has been defined as price fluctuation.

Unfortunately, they seem to be copying and pasting the old centralized way of doing things to the new ecosystem. This is in terms of registration and licensing. Bill seeks to recognize crypto as securities. So if you buy and sell within a year you pay income taxes. If you sell after 1 year you pay capital gain tax. This looks like adopted from the US.

The Bill looks like it’s aimed at formalizing and taxing crypto rather than safeguarding consumers. Though I haven’t had a look at the bill, from the article, it looks like it is missing critical components such as Directors of exchange ‘fit & proper form’, risk management, governance etc similarly availed by the National Payment System regulation.

The Crypto Reality

Security

The challenge with revealing information about how much crypto you have is that crypto isn’t like money in your bank account it is like cash in your house. Bitcoin like cash or gold is a bearer asset. The bearer is considered the owner.

Now imagine, revealing how much cash or gold you have in your house or office. What do you think will happen with the rising cases of insecurity in Kenya?

There’s a very good reason why Satoshi, the founder of Bitcoin, remains anonymous. It’s part of security.

2. Weakness of Centralized entities in the crypto space

A review of recent events in 2022 shows that it’s the centralized side of things that is failing not the decentralized one.

One of the proposals of the bill states “centralised electronic register of all transactions in digital currencies.”

Now if you Google “Celsius crypto records” you will see what happens when such a record becomes public.

In banking, “KYC accounts + Private records of amount & transaction”, in crypto “Anonymous owner with Private keys + Public wallet address & Transactions “. There’s an unknown aspect in each setup by default for security. Creating a “Known wallet address owner + Public Transaction record of amount & transactions” is a big risk.

You can’t put new wine in an old wineskin, it will just burst.

Decentralization

The benchmark for any crypto is Bitcoin, the pioneer of blockchain. Which is a peer-to-peer network that is:

Censorship-resistant from malicious actors and authoritarian government
Permission less
Immutable
Fungible
Zero trust verifiable & auditable
Secure
Neutral
Globally accessible
Software self-sovereign

Any Crypto that requires the permission of a centralized third party has failed the test of what blockchain entails in terms of being a decentralized peer-to-peer network. If verifiability is by a third party rather than the network, then it’s based on trust and susceptible to censorship and all sorts of things a decentralized network is supposed to resolve.

My analogy: Bitcoin which as proof-of-work is encrypted electric energy can be compared to oxygen, the miners are the trees, the nodes are the lungs and the wallets are the red blood cells. Any tree that is alive can be part of the network of production of oxygen, the trees are public the lungs are private to an individual. Oxygen is decentralized, censorship-resistant, permission-less and accessible to all.

GTZ Fx Trading Approach

We aren’t trading crypto directly so this doesn’t apply in my opinion but we will seek clarity from legal and tax advisors when the time comes.

In the presentation, I did on the intro to Crypto you can see the risks we highlighted especially 2,3 & 4 now happening (as of 2022).

The solution to the above Bitcoin risks in terms of new beginners who didn’t want to carry custodial risk was to do CFD (Contract-For-Difference) Margin trading.
Now there are also bills on taxes on the same i.e. derivatives trading

To join our coaching and copy trading, please click on this link.

Derivatives Trading: Income Tax [Financial derivatives] Regulations 2022

This is more like it for those who don’t understand derivatives this document, especially section 2 has clearly defined: • call option, • currency swap, • financial derivative, • forward contract, • future contract • interest rate swap • option contract • put option • option premium • swap • underlying asset

In this case, our underlying asset is crypto, when you deal with XAUUSD it’s gold, USOIL it’s oil, EURUSD it’s Euro etc.

Taxes

Now that they mention tax avoidance in section 5 let me define 2 things.

First and foremost this isn’t advisory of any kind just information sharing. Once we earn, consult an expert.

Difference between tax avoidance and tax evasion. Let me use the example of a tenant and a landlord to the best of my understanding.

1. Tax evasion is like a tenant who has rented a house but refused to pay rent e.g. 30k. The tenant has stayed in the house.
2. Tax avoidance is like a potential tenant who enquires about rent and finds it’s 30K but because it’s high opts to go to another house where it’s 15K. Stays and pays 15K.

A politically correct word I see people use for tax avoidance is tax efficiency. A tenant in this case is a resident and landlord of the country. As an investor, it’s important to engage professional tax advisory services and do tax planning so that you make the best decision of where to operate from either as a person or a company.

This is a good example of a company moving its headquarters to a location that has tax incentives. Other reasons would be tax breaks or lower corporate taxes.

Tax break: Tax breaks also known as tax preferences, tax concession, tax advantage, and tax relief, are a method of reduction to the tax liability of taxpayers. Government usually applies them to stimulate the economy and increase the solvency of the population. This fiscal policy act
Tax Relief: Tax relief refers to any government program or policy designed to help individuals and businesses reduce their tax burdens or resolve their tax-related debts. Tax relief may be in the form of universal tax cuts, targeted programs that benefit specific groups of taxpayers, or initiatives that bolster particular goals of the government. The relief typically comes in the form of filing and payment extensions, penalty and interest waivers, and deductions for casualty and theft losses sustained due to federally declared disasters.
Tax deductions let you deduct certain expenses (such as home mortgage interest) from your taxable income, thereby lowering the amount of tax you owe.
Tax credits directly reduce your tax bill and may provide a refund even if you don’t owe any tax. A tax credit is another form of tax relief. Unlike tax deductions, which lower your taxable income, tax credits directly reduce the amount of tax you owe.

Difference between Tax Credits & Tax deductions: Tax credits lower the amount of tax you owe, while tax deductions reduce your taxable income. Both save you money on your tax bill, but credits provide the most substantial savings.

Itemized deductions are expenses that can be subtracted from your adjusted gross income to lower your taxable income — and tax bill. For example Mortage interest, charitable donations, unreimbursed medical and dental expenses, investment interest expenses etc.

Depreciation, losses and Loan repayment falls under itemized deductions as they reduce overall taxable income.

Tax exclusions set aside certain types of income as non-taxable. As such, tax exclusions reduce your taxable income — and your tax bill. For example: If you earned income overseas, you might be eligible for the foreign-earned income exclusion
Tax debt relief: helps taxpayers catch up on back taxes and avoid tax liens, levies, and wage garnishments. Makes it possible to settle your tax debt for less than the total amount you owe.
Penalty abatement: reduce or remove penalties from your balance, but you must first prove that you had a legitimate reason for not paying your taxes on time. Reasonable cause includes fire, natural disasters, and other disturbances; the death, serious illness, or incapacitation of the taxpayer or a member of their immediate family; or an inability to obtain tax-related records.

Reference: https://www.investopedia.com/terms/t/tax-relief.asp

Tax Incentive

Definition: A tax incentive is an aspect of a government’s taxation policy designed to incentivize or encourage a particular economic activity by reducing tax payments. It attracts investment to a country, increases employment, a higher number of capital transfers, research and technology development, and also an improvement to less developed areas.

Examples: (Ref: https://www.fincyte.com/types-of-tax-incentives/)

1. The tax holidays are simply a temporary exemption offered to a new firm or an investment from individual specified taxes; typically, it may be corporate income tax.
2. Special zones: Zones are usually targeted at exporters and located close to a port. e.g. EPZ in Kenya
3. Investment tax credit: deduction of a given fraction of an investment from the tax liability
4. Investment allowance: deduction of a given fraction of investment from taxable profits. The value of an allocated allowance is equal to the product of the allocation and the tax rate.
5. Accelerated depreciation: depreciation at a significantly faster schedule than it is available for the rest of the economy.
6. Exemption from various taxes: kind of incentive involves exemption from some taxes, often those collected at the border, such as the tariffs, excise duty, and VAT on imported goods.
7. Financing Incentives: deductions in tax rates that apply to providers of funds, such as reduced withholding taxes on dividends
8. Reduced tax rates: reducing a tax rate, typically for the corporate income tax rate
9. Energy tax: offered to achieve specific environmental goals and, in most cases, is meant to do away with petroleum and other energy sources.
10. Tax for charitable contribution: a kind of incentive that a government offers to organizations or individuals who have proof of charity projects.
11. Disaster occurrence: A certain amount of money is usually waived to localities marked prone to a natural disaster.

Deferred tax liability: The deferred tax liability on a company balance sheet represents a future tax payment that the company is obligated to pay in the future. The obligation originates when a company or individual delays an event that would cause it to also recognize tax expenses in the current period.

Tax Plan: Investor’s perspective

I already had plans in place as shown below, where I will be presenting when the time comes how to go about this professionally with respective experts.

The reason investors are sensitive to tax is because of the above. It reduces the total return.

In the scenario above, 2 people started with 1$ but one ended at 1m$ the other 72K$. In any case, 25% of 1M$ is bigger than the little 25% deducted every other time.

So one big win as far as the above bills we had reviewed have is that they tax realized gains i.e. closed trades not running trades i.e. unrealized gains/losses.

So this allows profits to run and compound well.

So to end, as Robert Kiyosaki says in the book “Increasing your financial IQ” pg 59 & 60

“Taxes are an expense for living in a civilized society” — Rich dad
“A bureaucrat’s job is to get their hands deeper in your pockets — legally — and your job is to have them take as little as possible — legally” — Rich dad