Time for a clear tax framework to protect revenue and combat crimes- By Suresh R. I. Perera
Source:Sundayobserver
Virtual digital assets are simply digital versions of value or ownership that exist online rather than in physical form.
Cryptocurrencies, such as Bitcoin, are the most well-known type, acting as digital money that can be bought, sold, or used for payments. Stablecoins, such as USDT, are a special category designed to hold a steady value, usually pegged to the US dollar, making them popular for storing wealth without the typical wild price swings.
Meanwhile, tokens represent a specific asset or right on a blockchain, while Non-Fungible Tokens (NFTs) are unique digital certificates that prove ownership of one-of-a-kind items such as art or collectibles. It is also important to distinguish these from highly risky or vulnerable coins, which lack strong backing and can lose their value overnight.
Legal and tax framework
The rise of cryptocurrency has presented governments worldwide with a fundamental challenge: how to regulate a borderless, digital asset class without stifling innovation. For Sri Lanka, this challenge is particularly acute. As the country works to stabilise its economy and strengthen its international standing, the absence of a clear legal and tax framework for digital assets has created a dangerous blind spot that threatens state revenue and financial security.
Recent Government clarifications have confirmed a crucial principle: while cryptocurrency is not recognised as legal tender in Sri Lanka (unlike El Salvador), any earnings generated from crypto activities are subject to tax.
The Inland Revenue Department will consider crypto and digital assets as intangible assets and income and profits from the same is taxable income. However, this acknowledgment only highlights the larger problem, the current tax laws are dangerously outdated and lack the specific provisions needed to effectively tax and monitor a rapidly growing digital economy.
Sri Lanka’s hidden crypto economy
Sri Lanka’s cryptocurrency market is substantial but largely invisible. The Central Bank’s 2021 directive prohibiting banks from processing card payments for crypto transactions pushed most activity underground into peer-to-peer channels and foreign exchanges accessed through VPNs .
This regulatory void has had devastating consequences. Between 2020 and 2022, a Ponzi scheme operating from Colombo defrauded over 8,000 Sri Lankans of approximately Rs. 14 billion to Rs. 15 billion through a fictitious cryptocurrency. In another case, a Colombo Chief Magistrate noted that criminals are funneling money abroad through cryptocurrency, exploiting loopholes in the Foreign Exchange Act with zero Central Bank oversight.
Tax law
Globally, tax authorities have adopted different approaches to cryptocurrency taxation, commonly treating crypto as property or intangible assets, financial or investment assets, or, in rare cases, legal tender.
The U.S., UK and Australia broadly follow an asset-based model under which disposals of crypto may give rise to capital gains tax. In the U.S., long-term gains are generally taxed at 0%, 15% or 20%, while short-term gains may be taxed at ordinary income rates of up to 37%.
In the UK, crypto disposals fall within the capital gains regime, with current rates generally ranging from 18% to 24%, while losses may be used subject to reporting rules. Australia similarly taxes crypto under CGT principles, with capital losses generally available against capital gains, subject to exceptions such as personal-use assets.
India takes a stricter separate-regime approach by taxing Virtual Digital Asset gains at a flat 30% under section 115BBH, without permitting loss set-off or carry-forward. Nigeria has adopted a CGT-based approach, taxing gains from disposal of digital assets at 10% and permitting capital losses to be carried forward for up to five years against gains from similar assets. These differences show that the chosen legal classification directly affects rates, deductions and relief available to crypto investors.
The tax gap in Sri Lanka
The Inland Revenue Act No. 24 of 2017 makes virtually no mention of digital assets.
The current law lacks specificity and clarity regarding crypto-assets, leading to ambiguity, non-compliance, and potential revenue loss. While the law may theoretically treat cryptocurrencies as intangible assets subject to capital gains tax, in practice, hardly anyone accounts for taxes on their crypto activities.
This legal silence creates multiple problems
* No statutory definition exists for cryptocurrency, virtual digital assets, or digital tokens
* No explicit rules cover common crypto activities such as staking, airdrops, mining income, or crypto-to-crypto swaps
* No specific disclosure requirements exist for crypto holdings in tax returns or asset declarations
* No legal clarity exists on VAT, SSCL, or withholding tax treatment for crypto transactions
The ambiguity doesn’t only undermine revenue collection; it erodes trust in the entire tax system and pushes legitimate activity further underground.
Strongest weapon
The case for dedicated crypto tax legislation extends far beyond revenue generation. Targeted crypto taxation can serve as a strategic weapon against money laundering, financial crime, and revenue leak.
India provides a compelling roadmap. In 2022, India introduced a 30% flat tax on Virtual Digital Asset gains, a 1% Tax Deducted at Source on transactions, and a broad legal definition covering cryptocurrencies, NFTs, and tokens. These measures serve a dual purpose: they generate revenue while creating a transparent audit trail that supports financial intelligence and enforcement.
The logic is simple but powerful. Without clear tax rules, digital wallets become perfect veils for illicit wealth. By introducing mandatory reporting requirements, tax authorities can shift the burden of proof onto individuals to explain the source of funds used to acquire crypto. This approach is faster and more effective than chasing complex underlying crimes.
For Sri Lanka, adopting clear crypto tax legislation would:
1. Generate much-needed State revenue by capturing the taxable base currently operating in the shadows.
2. Create a transparent audit trail for financial intelligence and law enforcement.
3. Enable faster intervention and asset recovery in cases of fraud.
4. Align with international standards, helping Sri Lanka avoid FATF grey-listing.
Regulatory momentum
Encouragingly, the Government has begun to move. At the Cabinet meeting held on July 27, 2026, approval was granted to take future steps to introduce legal provisions for regulating virtual assets and Virtual Asset Service Providers (VASPs) in Sri Lanka.
A phased implementation roadmap through 2026/2027 has also been developed, while proposed amendments to the Financial Transactions Reporting Act seek to bring VASPs within Sri Lanka’s anti-money laundering and counter-terrorist financing framework by subjecting them to customer due diligence, beneficial ownership, record-keeping and suspicious transaction reporting obligations.
The Securities and Exchange Commission of Sri Lanka has been proposed as the regulatory authority for VASPs, within a supervisory structure coordinated by the Central Bank, the Financial Intelligence Unit and the Inland Revenue Department.
The reform process has also advanced through a dedicated VASP Sub-Committee, whose fourth meeting was reportedly held at the Central Bank on May 25, 2026.
However, the current reform momentum appears to focus mainly on AML/CFT compliance and supervisory architecture. The tax treatment of virtual assets remains comparatively underdeveloped. Without clear tax rules on definitions, taxable events, valuation, reporting and exchange-level disclosures, Sri Lanka’s emerging regulatory architecture will continue to carry a significant gap.
Five urgent tax reforms
To build a comprehensive and effective framework, policymakers should consider targeted amendments to the Inland Revenue Act:
* Broad statutory definition: Introduce a technology-neutral definition of “Virtual Digital Asset” covering cryptocurrencies, tokens, NFTs, and stable coins, with flexibility for future innovations.
* Clear taxable events: Explicitly list disposals for fiat, crypto-to-crypto exchanges, payments for goods/services, staking/mining rewards, and airdrops as taxable events
* Fair market value rule: Mandate valuation at Rupee fair market value on the transaction date to remove ambiguity.
* Source-of-funds obligation: Require declaration of fund origins when acquiring crypto, directly supporting anti-money laundering efforts.
* Exchange reporting mandate: Empower the IRD to demand transaction data from local and offshore exchanges involving Sri Lankan users.
These changes would align Sri Lanka with global best practices from jurisdictions such as the UK, Australia, and India, while giving tax authorities the tools needed for effective enforcement.
The cost of delay
Sri Lanka remains under an IMF-supported program that requires continued fiscal consolidation, stronger revenue mobilisation and the maintenance of a primary surplus. In practical terms, this includes moving Government revenue towards 15% of GDP range and sustaining a primary surplus consistent with IMF program targets.
At the same time, Sri Lanka is preparing for a crucial FATF mutual evaluation, which will assess compliance with international AML/CFT standards, including Recommendation 15 on virtual assets and Virtual Asset Service Providers.
The consequences of inaction are serious. Sri Lanka was previously placed on the FATF grey list in 2017 for strategic AML/CFT deficiencies and was removed only in 2019 after completing its action plan.
A renewed grey-listing could expose the country to enhanced international scrutiny, slower cross-border payments, higher compliance costs, reduced capital inflows and weaker investor confidence, all of which would undermine Sri Lanka’s economic recovery.
The Cabinet decision to regulate virtual assets is welcome, but it must be accompanied by clear, comprehensive tax provisions.
The path forward is clear. Sri Lanka should introduce dedicated crypto tax legislation covering definitions, taxable events, valuation, and reporting requirements. This framework should align with international standards, strengthen IRD capabilities, and be implemented through a phased approach with stakeholder engagement.
The price of delay is measured in billions of rupees of potential revenue loss, billions more in fraud losses borne by citizens, and continued vulnerability to financial crime. Sri Lanka has the opportunity to build a transparent, effective framework that protects State revenue and the public from the worst excesses of the crypto wild west.
The writer is an Accountant (FCMA (UK), CGMA, FCMA) and also an Attorney-at-Law (LLB).
