Nigeria wants to tax crypto. Traders say it could slow business

Meet Joshua Adedeji, a Nigerian OTC bulk trader who processes about $500,000 worth of USDTa dollar-backed stablecoinweekly on cryptocurrency exchange Bybit. His business is about to face a significant challenge: Nigeria's new virtual asset tax framework, which mandates a 1.5% stamp duty charge on digital assets. According to Adedeji, this tax cost is far higher than his existing operating costs, and it will likely drive activity away from regulated exchanges and into less visible channels.

The compliance burden will weigh heavily on crypto traders like Adedeji, who rely on very small price differences to make money. Frequent stamp duty deductions will increase the cost of moving money between wallets, exchanges, and customers, cutting into already thin margins for day traders and swing traders who buy and sell cryptocurrencies to speculate on price movements. Adedeji said he typically earns about ₦0.5 ($0.00037) per USDT on spreads when trading cryptocurrencies. This is a meager profit, and the additional tax burden will make it even harder for him to stay afloat.

The heart of peer-to-peer (P2P) trading is the volume of transactions, which doesn't necessarily translate into profit. Taxing multiple points of transactions will definitely have a bad ripple effect on P2P trading. Adedeji expects trading volumes to fall sharply if the tax rules are enforced strictly. "Volume of P2P will reduce drastically, because the margins of profit are slim, before even factoring in losses," he said. This is a dire prediction, and it's one that should give policymakers pause.

Kenny Olawale, a Lagos-based crypto trader who trades P2P on the agent-based stablecoin startup, Accrue, expects to see a similar squeeze. He said his business processes between $2,000 and $10,000 weekly across 50150 customers, and that stablecoin adoption among non-crypto-native users has been rising in recent months. However, the 1.5% crypto stamp duty could become problematic for stablecoins used for cross-border payments and daily expenditure. "The turnaround for exchanges when one user is funding a virtual card and another is paying at a restaurant doesn't even count as investment with a big return," Olawale said. "Charging 1.5% on each leg makes it all ridiculous."

It's predictable that Nigeria's crypto traders will find ways to circumvent this tax regime. When the costs of compliance outweigh the benefits of trading, traders will look for less visible channels to conduct their business. This will lead to a decrease in tax revenue for the government and a loss of confidence in the regulatory environment. The government should reconsider its approach to taxing cryptocurrency trading and focus on creating a more favorable environment for innovation and growth.

The future of crypto trading in Nigeria hangs in the balance. If the government enforces the new tax rules strictly, we can expect trading volumes to fall sharply, and the P2P business model to suffer. This will have far-reaching consequences for the economy, including a decrease in tax revenue and a loss of confidence in the regulatory environment. It's time for policymakers to rethink their approach to taxing cryptocurrency trading and focus on creating a more favorable environment for innovation and growth.