Just as the world gets crescively disrupted through the redefinition and driving of an increasing domain of human transactions by blockchain technology and the frenzy of a decentralized financial market gains increased traction across the globe, governments, as a crop of societal institutions that across ages have been at the centre of societal evolution, are increasingly growing nervous and recurrently frustrated in their bid to maintain the status quo in the financial sector.

When viewed from another angle other than the interest of protecting citizens from fraudulent activities, governments may not ordinarily be frustrated if their main concern, which is ostensibly taxes, were turned in unthreatened. When Benjamin Franklin sarcastically stated in 1789 that only death and taxes were certain,1 he could never have imagined a time when humanity would be so inventive as to independently go beyond a centralised banking system, evolve blockchain technology, build decentralized currencies and trading platforms, create the concept of Non-Fungible Tokens (NFTs), and eventually use it as it is today, amongst a slew of other blockchain-based technologies in the financial sector.

So far, however, the concept of NFTs has proven to be more of a speculative industry than an art collection enterprise, thereby creating more regulatory troubles for governments who are yet to grapple with the regulation of fungible tokens built on the blockchain network and technology, which in due time should enable the evolution of an effective taxation regime. For countries like Nigeria, the nightmare is made worse by its financial sector regulatory agencies, which have sought to avoid the subject of fungible tokens' legal status and content over the years, directing financial institutions to discontinue interaction with these technologies and frustrating any attempt by private individuals to use their services for the purposes.2

Hence, when the domain and content of cryptocurrencies are yet to be determined under Nigerian law to effectively rest its legal status, the questions of compliance abuse and general illegality do not only become mere concerns but a reality. For NFTs and their taxation, the troubles of investors and creators seem to be more complicated, primarily because Nigerian tax laws, just as universally obtained, have evolved in such a manner as to constructively cover all manner of human transactions having economic value. Thus, argumentatively, personal income tax, capital gains tax, and company income tax, as the case may be, amongst others, do apply to the transactions of purchase and sale of NFTs under Nigerian laws. However, the problem that arises rests with the trite principle of taxation law that a statute which seeks to impose a tax must do so in clear and precise terms so that the taxpayers and stakeholders will know who and what is being taxed.3 By implication, therefore, such wordings as "property" used in the Capital Gains Tax Act4 to denote assets chargeable, "income" used in the Personal Income Tax Act5 and "profit" as used in the Companies Income Tax Act6 for the purposes of defining accruable taxes on persons and companies, respectively, create real legal questions as to the situation of NFTs and cryptocurrencies by the means of which their transactions are generally effected under any of these constructions.

In light of the foregoing, it is important to note that taxes are deductible only on the basis of a recognized currency, whether Nigerian or that of another sovereign country.7 Consequently, given that NFTs and cryptocurrencies are yet to be recognized as currencies under Nigerian laws, does it allow the argument that any transaction of sale or purchase of NFTs by barter with another NFT or through a cryptocurrency is not taxable under Nigerian law? Theoretically, such arguments may avail the contender to the extent that the courts are willing to accept such as tax avoidance as against tax evasion and will therefore serve to preclude the investor or artist from any tax liability.8

However, it must be noted that even if such arguments are upheld by the courts, it will be extremely difficult, at the expense of saying impossible, for any person to satisfy the primary condition of not embroiling the Naira or any other recognized currency in their transactions, whether before the transaction or after its conclusion. The reasoning is simply based on the fact that cryptocurrency has not yet permeated every aspect of life in Nigeria in such a way that the investor or artist can solely use it as a means of daily transaction.

Expositorily, it is to be noted that personal income tax as within Nigeria in this circumstance will be applicable to the artist whose NFT is sold via another NFT or a token sum of cryptocurrency, either of which he eventually converts into a recognized currency, say the Naira. This is because the law will operate to input on the NFT sold or the cryptocurrency exchanged into fiat the status of a property that was created by the artist whose proceeds must be taxed. Ordinarily, this will be the same position as affecting company income tax mutatis mutandis. However, for capital gains tax, the events will be a little bit compounded as it involves the appreciation in value of a previously held economic position. Therefore, it will be necessary to determine the previous taxable economic position for the appreciated value to be thereafter taxed. Hence, when a collector or investor purchases an NFT, the instrument of purchase being traceable to a legal tender, and thereafter sells the same through an instrument of sale also traceable to a legal tender at a value in excess of that at which they purchased the NFT originally, such excess of value shall be subject to the tax regime affecting capital gains in Nigeria by imputation of the status of capital on such NFT by the law.

Conclusively and consequent of the foregoing analyses, all persons engaged in the sale and purchase of NFTs within the jurisdiction of Nigerian tax law must make every effort to keep their books up to date, as trading in a decentralized financial market may not be sufficient to exempt them from incurring tax liabilities.

References

1 NCC Staff. (2021, November 13). Benjamin Franklin’s last great quote and the Constitution. National Constitution Center – Constitutioncenter.Org. Retrieved April 21, 2022, from https://constitutioncenter.org/blog/benjamin-franklins-last-great-quote-and-the-constitution

2 Moses-Ashike, H. (2022, April 4). CBN warns Nigerians of illegal financial operators. Businessday NG. Retrieved April 21, 2022, from https://businessday.ng/banking/article/cbn-warns-nigerians-of-illegal-financial-operators/

3 Cape Brandy Syndicate v. IRC (1921) 1 KB 64

4 Section 3, Capital Gains Tax Act, CAP C1 LFN 2004

5 Section 3, Personal Income Tax Act, CAP. P8 LFN 2004

6 Section 9, Companies' Income Tax Act, CAP. C21 LFN 2004

7 Section 54, Companies' Income Tax Act, CAP. C21 LFN 2004

8 7UP Bottling Company PLC VS Lagos State Internal Revenue Board (2000) 3 NWLR (Pt 650) 565