Capital Gains, Crypto, and Compliance: Understanding SEC’s Incubation Programs and Tax Implications

The Nigerian Securities and Exchange Commission (SEC) recently announced significant advancements in its regulatory approach to digital assets through its Accelerated Regulatory Incubation Program (ARIP) and Regulatory Incubation (RI) Program. These programs, which aim to foster innovation while ensuring investor protection, have now granted “Approval-in-Principle” to two digital asset exchanges and admitted five firms to test their models and technologies.?

This development marks a critical step towards integrating digital assets into the Nigerian capital market, but it also raises some important tax considerations, particularly relating to some of the amendments introduced by the Finance Act 2023.

SEC’s Regulatory Incubation Programs: A Catalyst for Innovation

The SEC’s ARIP was introduced to strategically onboard firms that had begun operations before the release of the Rules on Virtual Assets Service Providers in May 2022. The focus of the ARIP is to fast-track the onboarding of Virtual Assets Service Providers (VASPs) and other Digital Investment Service providers (DISPs) who want to register with the SEC. ?

The RI Program, on the other hand, is designed to assess the business models of new digital assets (Fintech) firms, testing innovative products, services, and technologies in a controlled environment via basic but limited regulations. RI is aimed at innovators who have been assessed and considered eligible for SEC regulation, but for which no rules currently exist or for which amendment of current rules are required.?

These initiatives are characterized by the increasing use of Distributed Ledger Technology (DLT) in the creation and trading of crypto assets. The participating firms under these programs, such as Busha Digital Limited and Quidax Technologies Limited, operate digital assets exchanges that facilitate cryptocurrency trading with fiat currencies. Others, like Trovotech Ltd and Wrapped CBDC Ltd, focus on offering platforms for tokenizing real-world assets and introducing stablecoins pegged to the Nigerian Naira (?).?

The programs are designed to ensure that these digital assets and platforms operate within a secure and regulated environment, paving the way for broader adoption in the Nigerian financial ecosystem.

Tax Implications Under the Finance Acts 2023

While the SEC’s programs are a leap forward for the digital assets space in Nigeria, they also bring to the fore some critical tax considerations.

Capital Gains Tax (CGT)

The Finance Act 2023 included digital assets {Cryptocurrencies, Non-Fungible Tokens (NFTs), etc} as part of qualifying assets for CGT purpose. This means that any gains realized from the disposal of these digital assets would be subject to CGT. ?The tax rate for capital gains in Nigeria is currently 10%, and this applies to both individuals and corporate entities.?

This underpins the need for robust tax reporting and compliance mechanisms to ensure that CGT is accurately assessed and remitted on all capital gains from digital assets. The CGT Act requires that entities should compute CGT on all chargeable assets disposed, pay the tax computed and file self-assessment returns at least twice yearly (i.e. not later than ‘30 June’ and ‘31 December’).

For example, taxpayers who hold ‘tokenized real estate investments’ offered by platforms like HousingExchange.NG Ltd and Dream City Capital, must account for CGT on any capital gains realized from the disposal of these digital tokens. Similarly, the capital gains from trading cryptocurrencies on exchanges like Busha and Quidax would also be subject to CGT. ?

Other Related Taxes

There are provisions for the taxation of income derived from digital platforms, including income from staking, lending, trading of various forms of digital assets and other decentralized finance (DeFi) activities. For firms operating under SEC’s regulatory incubation programs, it is essential to navigate these tax obligations carefully. ?

The Nigerian tax law requires that all income derived by corporate entities (with Nigerian Income Tax Presence - either via local incorporation, Permanent Establishment or Significant Economic Presence) from digital assets must be reported and taxed in Nigeria, where such income is deemed to be derived from Nigeria. ?However, individuals who are Nigerian residents earning income (other than capital gains) from digital assets may be assessed to Personal Income Tax in Nigeria on their global income, whether such income is realized locally or from international sources. This underscores the importance of compliance with Nigeria’s tax laws and the need for digital assets firms and business owners to establish clear tax strategies that align with their business models and objectives.

Regulatory and Tax Compliance

As digital assets continue to gain traction in Nigeria, the intersection of regulatory oversight and taxation will become increasingly significant. The SEC’s ARIP and RI programs are a step in the right direction, providing a structured framework for the introduction and regulation of digital assets in the Nigerian capital market. However, the success of these programs will largely depend on the ability of participating firms to continuously ensure compliance with the relevant regulatory requirements and tax obligations.

For digital assets exchanges, offering platforms, and custodians, this means not only adhering to SEC’s guidelines but also ensuring full compliance with the extant tax provisions. ?Firms must implement robust tax reporting systems, maintain accurate records of all transactions, and ensure timely payment of taxes, including CGT, VAT, and income tax. ?

Balancing Innovation with Compliance

The ongoing efforts of SEC to regulate digital assets through its ARIP and RI programs reflect a commitment to fostering innovation while safeguarding the interests of investors. As these programs evolve, they will likely serve as a model for other regulatory jurisdictions looking to integrate digital assets into their financial markets.

However, as the digital assets landscape in Nigeria expands, so too will the complexity of the tax and regulatory environment. For firms operating in this space, the key to success will lie in balancing innovation with compliance, ensuring they not only seek to exploit the opportunities presented by digital assets, but also keen to fulfilling their obligations under Nigerian law. By doing so, they can contribute to the growth and stability of the Nigerian capital market, paving the way for a new era of financial innovation and inclusion.

Empowering Businesses for the Future

As the digital asset landscape in Nigeria continues to evolve, the intersection of innovation, regulation, and taxation becomes increasingly complex. At Stransact, we understand the unique challenges businesses face in navigating this dynamic environment. Our team of tax, regulatory, and advisory experts is well-positioned to guide firms through the intricacies of compliance while fostering growth and innovation.

We offer tailored solutions that go beyond mere compliance—by deeply understanding your business needs, we help you seize new opportunities while mitigating risks. Whether you’re a digital asset provider seeking regulatory clarity or a business looking to optimize tax strategies under the Finance Act 2023, our holistic approach ensures you remain competitive in this rapidly changing landscape.

Let us empower your business with forward-thinking strategies and expert guidance that drive success and sustainability for the future. Together, we’ll help you navigate the challenges of today and thrive in the opportunities of tomorrow.