The tax question in Kenya’s evolving digital asset economy

Get it wrong, and the cost may be not only lost revenue but also reduced competitiveness in one of the fastest-growing segments of digital finance.

Kenya’s leadership in digital payments, anchored by innovations such as M-Pesa, created the foundation for a broader expansion in digital financial services. Virtual assets, the regulatory term for what are broadly known as digital assets, are now part of that evolution.

According to the Chainalysis Crypto Adoption Index, Kenya ranks 21st on the Chainalysis 2025 Global Crypto Adoption Index, with over $19 billion in cryptocurrency inflows between July 2024 and June 2025 and more than six million crypto users, placing it among the leading markets globally in crypto adoption and transaction activity.

Much of this activity is driven by USD-pegged stablecoins such as USDT and USDC, used for storing value and accessing dollar-denominated exposure. This reflects a broader global shift where stablecoins are emerging as both payment instruments and a hedge in environments of currency volatility.

The regulatory framework is beginning to respond. The enactment of the Virtual Asset Service Providers Act 2025, together with the ongoing development of implementing regulations, marks a shift toward formalising the sector.

The Act establishes a licensing and supervisory framework shared between the Central Bank of Kenya and the Capital Markets Authority, providing a clearer compliance architecture while underscoring the importance of ensuring the tax framework evolves coherently alongside it.

These domestic developments are unfolding alongside broader international trends. Frameworks such as the Organisation for Economic Co-operation and Development’s Crypto-Asset Reporting Framework and the European Union’s DAC8 directive are moving toward mandatory reporting of crypto transactions and enhanced information exchange between tax authorities.

Kenya’s own Finance Bill 2026 proposal to introduce reporting obligations for virtual asset service providers through the Tax Procedures Act is broadly consistent with this direction, signalling an intent to align domestic compliance architecture with emerging international standards.

The more complex challenge lies in how the sector is taxed. The introduction of a three percent digital asset tax under the Finance Act 2023 generated considerable debate, applying to the full value of transactions regardless of profitability.

Its subsequent repeal and replacement with a 10 percent excise duty on fees represents an important evolution, shifting the tax base from transaction value to service fees and aligning more closely with the treatment of other financial services.

The Finance Bill 2026 takes this further by proposing a reporting and record-keeping framework for virtual asset transactions through amendments to the Tax Procedures Act.

The Treasury’s rationale is straightforward: traditional financial activity operates within established accounting and reporting systems that enable tax administration; virtual assets have grown rapidly but remain outside these systems. The proposal seeks to close that gap.

Notably, it is framed as a compliance measure rather than a revenue measure, though whether it operates that way in practice will depend on how the obligations are designed and enforced.

However, the treatment of virtual asset services within the wider tax framework remains unresolved. At the centre of the debate is the value-added tax (VAT).

Virtual asset service providers are currently subject to VAT on transaction fees, brokerage and custodial services, in addition to excise duty and corporate income tax. This raises a fundamental policy question: how should virtual asset services be classified for tax purposes?

This issue has been sharpened by Pesapal Limited v Commissioner of Domestic Taxes (2025), in which the High Court held that payment service provider commissions constitute VAT-exempt financial services.

The court emphasised that tax treatment should be determined by the nature of the service, specifically the processing and transfer of value, rather than the platform through which it is delivered.

Virtual asset service providers argue their activities are functionally similar, facilitating the exchange, transfer and storage of digital value for clients. From this perspective, the distinction between fiat currency and digital value becomes increasingly difficult to sustain.

The position is further complicated by proposals in the Finance Bill 2026 to bring digital payment intermediaries within the VAT net, sitting in some tension with the Pesapal ruling and illustrating that the boundary between a taxable digital platform and an exempt financial service provider has not yet been definitively resolved, either by the courts or the legislature.

The implications are significant. The cumulative tax burden, including excise duty on fees, VAT on services, and corporate income tax, may increase costs in a market characterised by thin margins, with consequences for innovation, competitiveness and the location of digital asset activity.

At the same time, clarity and consistency in tax policy remain essential. A well-defined framework supports compliance, reduces administrative complexity and strengthens revenue collection. Kenya is not approaching a critical moment in the design of its digital asset tax framework; it is already in one.

The Finance Bill 2026 is before Parliament, and the policy choices embedded in it will shape the sector’s development for years to come.

The priority is to ensure the framework that emerges is clear, proportionate and aligned with the realities of a digital asset economy, striking the right balance between revenue mobilisation and market development, and ensuring that Kenya remains both competitive and well-regulated in an increasingly digital global economy.

The writer is an Eisenhower Fellow and Managing Partner at Wakiaga and Company Advocates, with expertise in public policy, international trade, investment, private sector development and governance. Email: [email protected]