Sri Lanka needs to implement express tax legislation for Cryptocurrency
Mr. Suresh R.I. Perera
As Sri Lanka prepares for its Budget 2026, policymakers face a critical opportunity to address a growing gap in the country’s tax system: the absence of clear and enforceable tax laws for cryptocurrency transactions. Despite repeated warnings from the Central Bank (CB) about the risks associated with cryptocurrency, it remains neither illegal nor regulated just as the case in India. In fact, as recently clarified by the CB Governor, while its use for everyday transactions is prohibited (not legal tender), investing in cryptocurrency is not against the law.
This legal ambiguity has created a grey area in tax enforcement. Without clear rules, potential revenue slips through the cracks, and the financial system is exposed to risks such as tax evasion, money laundering, and terrorism financing. Introducing precise tax provisions for the cryptocurrency industry is not just a fiscal necessity—it is a strategic move to protect Sri Lanka’s economic integrity in the digital age.
Currently, cryptocurrencies may be loosely categorised as “intangible assets” under Sri Lanka’s general tax laws. However, the lack of specific definitions and guidance makes it difficult for individuals to understand how to report crypto income. Even well-meaning taxpayers may unintentionally fail to disclose earnings, leading to underreporting or complete non-compliance. This weakens enforcement and opens the door to misuse.
Sri Lanka’s tax system is well-structured for conventional assets and income sources, but it lacks the adaptability needed to manage the complexities of digital assets. Cryptocurrency transactions—such as trading or exchanging digital assets, income from staking rewards, proceeds from airdrops—often take place across borders and in real time. These activities are not adequately addressed by the current tax framework. Relying solely on broad classifications under capital gains or business income is no longer sufficient. In the absence of tailored definitions, specific thresholds, and structured reporting obligations for crypto transactions, tax enforcement becomes inconsistent and lacks reliability.
To address this, Sri Lanka urgently needs dedicated cryptocurrency tax legislation. Such a law would bring clarity to taxpayers, strengthen enforcement, and demonstrate the country’s readiness to responsibly embrace digital finance. Drawing from global best practices in countries like the UK, Australia, and India, the legislation should: Define what constitutes a taxable crypto transactionEstablish valuation methods for digital assetsSet clear record-keeping and reporting requirementsIntroduce penalties for non-compliance.
This would also empower the Inland Revenue Department (IRD) to issue guidance, build technical expertise, and work closely with the CB and Financial Intelligence Unit (FIU) to ensure alignment with anti-money laundering (AML) and counter-terrorism financing (CFT) standards.
VAT and Crypto Services: A Step Forward
Sri Lanka has initiated a regulatory step for crypto services by introducing a Value Added Tax (VAT) framework. According to Gazette Notification No. 2443/30, non-resident digital service providers, which encompass crypto exchanges, are mandated to register for VAT, apply an 18 per cent tax on relevant services, and remit this amount to the Inland Revenue Department (IRD). Though its enforcement has been postponed until April 1, 2026, this regulation marks a significant development in taxing the digital economy.
The platforms that enable trading, wallet management, and transaction processing are clearly providing services. This requirement for platforms to register and report user activities grants the IRD crucial data—such as trading volumes, wallet addresses, and income generated by Sri Lankan users. This information can then be cross-referenced with income tax declarations to identify evasion and enhance overall tax compliance.
Furthermore, this VAT registration process is key to strengthening Anti-Money Laundering (AML) and Counter-Financing of Terrorism (CFT) efforts. It aids regulators in tracing suspicious financial flows and enforcing due diligence standards. Essentially, it establishes the groundwork for a more comprehensive regulatory structure that aims to harmonise technological innovation with financial accountability.
A Defining Moment for Fiscal Reform
With the Budget Speech on November 7, policymakers have a golden opportunity to introduce a comprehensive legislative framework for taxing cryptocurrencies and digital assets. Failing to act now means continued revenue loss, weak enforcement, and missed opportunities to regulate a rapidly growing sector.
By including a budget proposal to the effect to enact clear tax provisions commencing from the Year of Assessment 2026/2027 into the Tax statutes, Sri Lanka can position itself as a forward-looking nation—ready to harness the benefits of the digital economy while protecting its financial system and ensuring fair, transparent taxation for all.
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