In February, Nigeria initiated legal action against Binance for unpaid taxes and implemented new cryptocurrency tax regulations in an attempt to revitalize its struggling economy. However, the intended effects of these measures may not materialize.
Despite being predicted to experience the highest average GDP growth between 2010 and 2050, Nigeria’s economic development has faltered in recent years. As a result, the government has introduced significant tax reforms and a minimum wage framework.
The country believes that targeting unregulated crypto exchanges like Binance can generate over $81 billion in revenue by implementing taxes on cryptocurrency transactions. However, Nic Puckrin, founder of The Coin Bureau, doubts that this tax will be a straightforward solution. He states, “Nigeria has one of the largest markets for retail OTC trading. Moreover, importers often turn to crypto to deal with the volatile NGN exchange rates…they will face significant challenges in collecting these taxes.”
Nigeria is home to Africa’s largest cryptocurrency market, 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.
In 2022, Nigeria’s Securities and Exchange Commission (SEC) issued rules on digital assets, 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 for alleged economic losses caused by the exchange’s operations in the country. Additionally, the government is pursuing $2 billion in back taxes.
Nigeria’s 2023 National Blockchain Policy aims to integrate blockchain into public services, indicating a long-term alignment with crypto. The introduction of Africa’s first central bank digital currency (CBDC), the eNaira, and the growth of fintech startups like Flutterwave and Chipper Cash have significantly increased financial inclusion in the country, reaching 64% of adults in 2023.
Maksym Sakharov, co-founder and board member of WeFi, acknowledges that Nigerian regulators understand the country’s significance in the global cryptocurrency industry. He states, “Besides being the largest economy in Africa, it also has the highest crypto adoption level, making the prospect of taxing crypto transactions an economically promising move.” However, Sakharov highlights Nigeria’s historical struggles with implementing market-changing policies due to high levels of corruption.
In Nigeria, peer-to-peer (P2P) trading platforms are primarily used 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 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) collected 10.1 trillion Nigerian naira ($12.7 billion) in 2022, with only 12% of the labor force formally employed and contributing taxes. VAT and corporate taxes dominate 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 be an attempt to collect taxes from the informal sector and unbanked population. The informal sector accounts for 65% of Nigeria’s GDP and largely operates outside of the government’s tax system.
Maksym cautions that while taxing crypto is not unreasonable, many crypto traders in Nigeria have lost faith in the government and may find ways to bypass these tax provisions. With the largest exchange, Binance, not fully operational in the country, users have developed a thriving P2P and over-the-counter 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 clear move to tap into the informal economy. The proposed 0.5-1% capital gains tax on crypto profits and 10% VAT on exchanges could generate up to 200 billion Nigerian naira ($250 million) annually. However, over-taxing cryptocurrency users may push them towards unregulated P2P platforms, undermining compliance.
Nic Puckrin believes that the government will face challenges in collecting taxes. He states, “Nigeria has a thriving P2P ecosystem, so if users wanted to avoid paying fees on centralized exchanges, they would just take their transactions off the platforms. I also don’t think the government has the resources to enforce this or track down those who don’t comply.”
Nigeria’s crypto tax proposal reflects a broader effort to formalize the digital and informal economies while addressing fiscal pressures. Success depends on striking a balance between regulation and innovation while ensuring compliance.
To strengthen enforcement, Nigeria could adopt blockchain analytics tools, as India did in collaboration with Chainalysis for tracing taxable transactions. The recent SEC guidelines for virtual asset service providers (VASPs) in Nigeria already align with FATF recommendations, enabling better oversight of formal exchanges.
Digitizing tax processes and expanding the mandate of the Economic and Financial Crimes Commission (EFCC) could 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.