How are airdrops taxed?
An airdrop occurs when cryptocurrencies, blockchains or projects distribute a coin or token, often employed as a marketing mechanism to gain momentum in the early stages. There are 2 different ways in which airdrops are conducted; one requires users to engage in a particular action or task, and the other is when the user is automatically given an airdrop as a holder of the chain’s coin.
In Australia, the ATO has stated that the money value of an established token received through an airdrop will be taxed as ordinary income of the recipient at the time it is derived. The ATO has also recently clarified that ‘non-established tokens’ airdrops (tokens which have not been traded prior to the airdrop) are not taxable, nor do they trigger a CGT event. Furthermore, the airdropped tokens will have a zero cost basis for CGT purposes and the timing for the 12 month discount is when the tokens are received by the user.
Any airdrop into your wallet will likely be viewed as ordinary income by the IRS, who are likely to consider it an ascension to wealth and should be reported as income at the time of receipt. The value of the cryptocurrency used is the fair market value of the token at the date and time you become the beneficial owner. In situations where you need to claim an airdrop, the fair market value is likely dated at the point in time where you receive or are able to claim it.
It is important to note that if, in the future, you decide to dispose of the tokens you received by airdrop, the IRS may state you also have to pay Capital Gains Tax on these tokens, with the cost basis being the value of the token when you received it.
In the UK, the HMRC has clarified that airdrops are considered ordinary income if you did something to “earn” the reward. It is unclear exactly where this border lies, but for example, if you received UNI for trading on Uniswap, then this could potentially be classified income, since you did have to do something to receive this reward. You should talk to your accountant about your individual circumstances.
If you decide to go on to sell the assets you received through the airdrop, the cost basis will be the market value at the time of receipt.
Unfortunately, the CRA has not yet clarified whether proceeds from airdrops are subject to income and/or capital gains tax. We recommend talking to a tax professional to establish whether any airdrops you received could be viewed as income by the CRA.
Although there may be uncertainty about airdrops constituting income tax, it is highly likely that any gains made thereafter by disposing of the airdrop tokens will be classified as capital gains and thus subject to Capital Gains Tax.
As stated in the examples above, it’s evident that how your airdrop rewards will be taxed will depend entirely on the rules of your tax jurisdiction.
We recommend reaching out to a local tax professional to ask for their advice on how airdrops are treated for tax purposes in your region.
In the CryptoTaxCalculator platform, we give you several tools to help you categorize your airdrop transactions accordingly. As most regions see airdrops as an income tax event, our algorithm will auto-categorize any activity that matches this criteria accordingly (you also have the ability to manually categorize transactions depending on the specific guidelines in your region). For any future capital gains tax events, the cost basis is tracked by our algorithm as well.
Another way our platform helps is by giving you the option to mark specific airdrops as ‘scam’ airdrops. Many individuals will not realize that their wallet has received scam tokens until it has been uploaded to CryptoTaxCalculator. If you have uploaded a wallet and are noticing ‘incoming’ transactions from unknown sources that you do not recognize, they could be scam airdrops. Some scam tokens will show an extremely high value. If left categorized incorrectly, these scam airdrops could potentially impact your tax outcomes substantially as their artificially high valuation could lead to an inflated income, balance and/or capital gains figure. Once you are certain a transaction is a scam airdrop, you can manage it quickly and easily through the CryptoTaxCalculator platform.
Once all scam airdrop transactions on the page have been selected, use the tool box on the bottom of the page and mark them as 'spam'. We also have an auto-suggested reconciliation flow for Suspected Spam Tokens. Our algorithm will suggest a list of spam cryptocurrencies, allowing you to then confirm whether or not they should be marked as spam for your tax report, allowing you to spend less time manually selecting and categorising spam transactions.
By doing this, you are telling the platform to not include this transaction in your calculations.
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