In February, Nigeria filed a lawsuit against Binance for unpaid taxes and implemented new regulations on cryptocurrency taxation in an attempt to revive its struggling economy. However, it is uncertain whether these measures will have the desired effects.
Nigeria is ranked as the 53rd largest economy in the world and is projected to have the highest average GDP growth between 2010 and 2050, according to Citigroup. Nevertheless, the country’s economic development has stagnated in recent years, leading the government to introduce significant tax reforms and a minimum wage framework.
The government believes that targeting unregulated crypto exchanges like Binance can generate over $81 billion in revenue by implementing taxes on cryptocurrency transactions. However, according to Nic Puckrin, founder of The Coin Bureau, this tax will not be a straightforward solution. Nigeria has one of the largest markets for retail over-the-counter (OTC) trading, and importers frequently turn to cryptocurrency to manage the fluctuating exchange rates of the Nigerian Naira. Therefore, the government may face challenges in collecting the proposed taxes.
Nigeria is home to the largest cryptocurrency market in Africa, with approximately 22% of its population (around 47 million people) owning or using crypto assets. Since lifting the ban on digital currencies in 2021, the Nigerian government has been proactive in responding to the growth and adoption of cryptocurrencies. The Securities and Exchange Commission (SEC) of Nigeria issued regulations on digital assets in 2022, recognizing crypto as securities and providing guidelines for exchanges and custodians.
The government is determined to benefit from crypto transactions and has taken legal action against Binance, seeking $81.5 billion in compensation for economic losses caused by the exchange’s operations in the country and $2 billion in back taxes.
The National Blockchain Policy of 2023 aims to integrate blockchain technology 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 expanded financial inclusion, reaching 64% of adults in 2023.
Maksym Sakharov, co-founder and board member of WeFi, emphasized that Nigerian regulators understand the country’s position in the global cryptocurrency industry. With its status as Africa’s largest economy and the highest level of crypto adoption, taxing crypto transactions is seen as a promising economic move. However, Nigeria’s history of inefficient implementation of market-changing policies raises concerns. Corruption remains a significant obstacle to successful implementation.
Many Nigerians use peer-to-peer (P2P) trading platforms to mitigate the effects of currency depreciation and high inflation. While this level of crypto adoption has not resulted in significant GDP growth, it has supported Nigeria’s digital economy, which contributed 18.4% to the GDP in the fourth quarter of 2023.
Nigeria has one of the lowest tax-to-GDP ratios globally at 6%, according to the World Bank. In 2022, the Federal Inland Revenue Service (FIRS) of Nigeria collected 10.1 trillion Nigerian naira ($12.7 billion) in taxes, with only 12% of the labor force formally employed and contributing to tax revenue. Value-added tax (VAT) and corporate taxes dominate the revenue, while personal income tax compliance 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 have an underlying motive of collecting taxes from the informal sector and the unbanked population. The informal sector accounts for 65% of Nigeria’s GDP and operates mostly outside the government’s tax system.
Maksym Sakharov believes 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 the taxation measures. With the largest exchange, Binance, not fully operational in the country, users have developed a thriving P2P and over-the-counter (OTC) market to conduct their transactions.
Approximately 45% of Nigerian adults do not have bank accounts, but 35% use crypto for remittances and savings. Taxing crypto transactions is a clear attempt 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, excessive taxation may drive users to unregulated P2P platforms, undermining compliance.
Nic Puckrin believes that the government will struggle to collect taxes. Nigeria has a thriving P2P ecosystem, so users can easily bypass centralized exchanges to avoid fees. Furthermore, the government may lack the resources to enforce the taxation measures or 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 will depend on finding the right balance between regulation and innovation, ensuring compliance. Excessive taxation could hinder adoption, but well-implemented policies may increase the country’s revenue and promote further financial inclusion.
To strengthen enforcement, Nigeria could adopt blockchain analytics tools, as India has done in collaboration with Chainalysis to trace 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.
Initiatives to combat corruption, such as digitizing tax processes and expanding the mandate of the Economic and Financial Crimes Commission (EFCC), could reduce illicit activities. 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.