How are token airdrops taxed?

Overview

In Australia, the Australian Taxation Office (ATO) separates the tax treatment of airdrops into two categories:

1. Initial Allocation Airdrops - tokens that have not been previously traded; and,
2. General Airdrops - tokens that have been traded previously.

Broadly, when a General Airdrop is received, the market value of the token will form part of your ordinary income (like salary and wages). There’s no capital gains tax (CGT) that occurs at this point in time, but if you later dispose of the token, you may trigger CGT on that disposal.

Comparatively, when an Initial Allocation Airdrop is received, there are no tax consequences. The market value of the token does not form part of your ordinary income and there’s no CGT payable at that time. Instead, the cost base of the token is equal to the amount you paid to acquire it; and, if you later dispose of the token, you may trigger CGT on that disposal. If you didn’t pay anything to acquire the token, this means that the cost base will be zero.

What’s the Difference?

For convenience, we’ve summarised the differences in the following table:

As you can see above, the only real difference between the two arises when the token is received. Other than that, the tax treatment is the same.

Example - Initial Allocation Airdrop

Caleb receives an Initial Allocation Airdrop of 1,000 tokens from a new cryptocurrency project. While Caleb did not pay anything to acquire the tokens, an independent valuer determines that the market value of each token is $0.50 (i.e., $500 in total). According to the ATO web guidance, no cost base is assigned to these tokens when they are received even though their market value is above zero. Caleb also does not need to report the receipt of the tokens in his ordinary income.

Subsequent Disposal: Several months later, Caleb decided to sell all 1,000 tokens. By this time, the market value of each token has risen to $5.00. The total proceeds from the sale are calculated as follows: 1,000 tokens × $5.00 per token = $5,000.

Since the initial cost base of the tokens was zero, the entire amount Caleb received from the sale is treated as a capital gain: Total Sale Proceeds ($5,000) - Cost Base ($0) = $5,000.

Caleb will need to report the $5,000 as a capital gain on their tax return. This amount is subject to Capital Gains Tax (CGT) based on Caleb’s marginal tax rate or any applicable CGT discount (e.g., a 50% discount if you held the asset for more than a year).

In this scenario, because the initial airdrop had no assigned cost base, the entire amount received from the subsequent sale of the tokens is treated as a capital gain.

Example - General Airdrops

Let’s go through an example involving a previously trading token received as an airdrop, where the tokens are treated as income upon receipt and later trigger a capital gain or loss when disposed of.

Initial Airdrop Allocation: Lex receives an airdrop of 500 tokens. At the time of the airdrop, each token is valued at $2.00. Since the tokens are considered assessable income upon receipt, Lex will need to report the market value of the tokens as income:

500 tokens × $2.00 per token = $1,000.

This $1,000 will be added to Lex’s income for the tax year and taxed at the marginal tax rate.

The cost base for these tokens is now established as $2.00 per token, based on the market value at the time of receipt. This value will be used to calculate any capital gains or losses when Lex later disposes of the tokens.

Token Disposal: A few months later, Lex decides to sell all 500 tokens. By this time, the market value of each token has increased to $3.00. The total proceeds from the sale are: 500 tokens × $3.00 per token = $1,500. To determine the capital gain, Lex needs to subtract the cost base from the sale proceeds:

Cost Base: 500 tokens × $2.00 per token = $1,000.

Total Sale Proceeds ($1,500) - Cost Base ($1,000) = $500.

In this example, the tokens received as an airdrop are first treated as income at their market value upon receipt, which establishes a cost base for future transactions. When the tokens are later sold, the difference between the sale proceeds and the cost base results in a capital gain or loss, which is then subject to CGT. This highlights the dual impact of airdrop tokens on both income and capital gains tax.

In Australia, while airdrop tokens are taxed as ordinary income upon receipt, any subsequent capital losses from selling those tokens cannot be used to offset that income. This can place taxpayers in a difficult position if the value of the tokens drops significantly after they receive the airdrop, leaving them responsible for paying tax on income that no longer reflects the current value of their assets.