In February, Nigeria filed a lawsuit against Binance for unpaid taxes and implemented new cryptocurrency tax regulations to stimulate its struggling economy. However, these measures may not have the desired effects.
According to Citigroup, Nigeria is predicted to have the highest average GDP growth between 2010 and 2050, ranking as the 53rd largest economy in the world. Despite this, the country’s economic development has faltered in recent years, leading the government to introduce significant tax reforms and a minimum wage framework.
The government believes that regulating crypto exchanges like Binance can generate over $81 billion in revenue, with the introduction of taxes on cryptocurrency transactions. However, Nic Puckrin, founder of The Coin Bureau, suggests that this tax may not be a straightforward solution. Nigeria has a large market for retail over-the-counter (OTC) trading, and importers often rely on crypto to deal with the volatile exchange rates of the Nigerian Naira. As a result, the government may face challenges in collecting these taxes.
Nigeria is home to Africa’s largest cryptocurrency market, with approximately 22% of its population (about 47 million people) owning or using crypto assets. After lifting its ban on digital currencies in 2021, the Nigerian government has been quick to respond to the growth and adoption of cryptocurrencies.
The Securities and Exchange Commission (SEC) of Nigeria issued its rules on digital assets in 2022, recognizing crypto as securities and providing guidelines for exchanges and custodians.
The government has taken legal action against Binance, seeking $81.5 billion for economic losses caused by the exchange’s operations in the country and $2 billion in back taxes.
The government’s 2023 National Blockchain Policy aims to integrate blockchain into public services, indicating a long-term alignment with cryptocurrencies. The Central Bank of Nigeria’s eNaira, Africa’s first central bank digital currency (CBDC), and fintech startups like Flutterwave and Chipper Cash have contributed to financial inclusion, reaching 64% of adults in 2023.
Maksym Sakharov, co-founder and board member of WeFi, acknowledges the potential economic benefits of taxing crypto transactions in Nigeria. However, he also highlights the country’s poor implementation of market-changing policies due to high levels of corruption.
In Nigeria, peer-to-peer (P2P) trading platforms are primarily used to counteract the effects of currency depreciation and high inflation. This level of crypto adoption has not resulted in significant GDP growth but has supported Nigeria’s digital economy, which contributed 18.4% to GDP in the fourth quarter of 2023.
Nigeria has one of the lowest tax-to-GDP ratios globally, standing at 6%, according to the World Bank. The Federal Inland Revenue Service (FIRS) of Nigeria collected 10.1 trillion Nigerian naira ($12.7 billion) in 2022, with only 12% of the labor force formally employed and contributing to taxes. VAT and corporate taxes are the main sources of revenue, while compliance with personal income tax is weak.
With only 9% of Nigeria’s 70 million taxable adults paying income taxes in 2022, the move to tax individual cryptocurrency transactions may be an attempt to collect taxes from the informal sector and unbanked population. The informal sector accounts for 65% of Nigeria’s GDP and currently operates largely outside of the government’s tax system.
Maksym Sakharov suggests that while taxing crypto is not unreasonable, many crypto traders in the country have lost faith in the government and may find ways to bypass these taxation provisions. With the largest exchange, Binance, not fully operational in Nigeria, users have established a thriving P2P and OTC market to conduct their transactions.
Approximately 45% of Nigerian adults are unbanked, but 35% use crypto for remittances and savings. Taxing crypto transactions is a strategy to tap into the informal economy. The proposed capital gains tax of 0.5-1% on crypto profits and a 10% VAT on exchanges could generate up to 200 billion Nigerian naira ($250 million) annually.
However, the risk of over-taxation may drive crypto users to unregulated P2P platforms, undermining compliance. Nic Puckrin believes that the government will face difficulties in collecting taxes, as Nigeria has a thriving P2P ecosystem and users can easily avoid fees on centralized exchanges by conducting off-platform transactions. He also doubts the government’s capacity to enforce and track down non-compliant individuals.
Nigeria’s crypto tax proposal reflects a broader effort to formalize the digital and informal economies while addressing fiscal pressures. Success depends on finding the right balance between regulation and innovation, as well as ensuring compliance.
To strengthen enforcement, Nigeria could adopt blockchain analytics tools, as India has done in collaboration with Chainalysis for tracing taxable transactions. The recent SEC guidelines for virtual asset service providers (VASPs) in Nigeria already align with recommendations from the Financial Action Task Force (FATF), enabling better oversight of formal exchanges.
Digitizing tax processes and expanding the mandate of the Economic and Financial Crimes Commission (EFCC) could help reduce corruption. The EFCC aims to support Nigeria’s mission to become a country free of economic and financial crimes. By combining transparency measures driven by technology with public education on the benefits of taxation, Nigeria may gradually build trust and compliance in its crypto economy.