CRYPTOCURRENCY TAX
TRANSACTION TYPES
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Airdrops
What is an Airdrop?
An airdrop is when an individual receives an allocation of tokens or other cryptoassets.
For example, tokens are given as part of a marketing or advertising campaign in which people are selected to receive them. Other examples of airdrops may involve tokens being provided automatically due to other tokens being held or where an individual has registered to become eligible to take part in the airdrop.
The airdropped cryptoasset typically has its own infrastructure (which may include a smart contract, blockchain or other form of distributed ledger technology) that operates independently of the infrastructure for an existing cryptoasset.
Tax Treatment of Airdrops
Income Tax
Taxable airdrops - Miscellaneous Income
Airdrops are taxable income if they are received in return for, or in expectation of, the individual performing a service or doing something in return in order to qualify (even just participating in a social media campaign).
Although not in HMRC guidance, it seems to be generally accepted that if the recipient of the airdrop provides a service to the issuer, for example providing some coding work, or an influencer shilling the crypto; that would make it taxable as income. It is thought that merely sharing a social media post would not make it taxable income.
When taxable, the sterling market value of the cryptoassets at the date of receipt should be recorded on the Tax Return as miscellaneous income, subject to income tax.
Non taxable airdrop - No Income to Declare
HMRC have confirmed that if the airdropped tokens are received without an expectation of, or doing anything in return, and are not received as part of a trade or business involving cryptoassets or mining; there is no income to declare and no income tax to pay.
Trading Income
If airdrops are received as part of a trade or business involving cryptoassets or mining; the sterling market value of the cryptoassets at the date of receipt should be recorded on the Tax Return as trading income, subject to income tax.
Capital Gains Tax
The cryptoassets received as an airdrop will be subject to the capital gains tax regime when they are disposed of, regardless of whether it is treated as taxable income or not upon its receipt.
There is likely to be a taxable capital gain upon the disposal of the airdropped token, based on the increase in value since acquisition.
Acquisition cost of income taxable airdrops
The sterling market value of the cryptoassets at the date of receipt is treated as the acquisition cost for capital gains tax purposes.
Acquisition cost of non-income taxable airdrops
There is no HMRC guidance on the acquisition cost of non-taxable airdrops, therefore this remains an area of uncertainty.
It could be argued the acquisition cost is Nil, or the acquisition cost could be the market value of the tokens at the date of receipt, depending on the circumstances - see below.
If the smart contract is executed and the airdropped tokens are issued into one public address and then later they are transferred to the recipient it may be possible to argue that the acquisition cost of the airdropped tokens is the sterling market value at the date of receipt, but only if it can be argued that a ‘bargain made otherwise than at arm's length’. There is uncertainty as to whether or not a ‘bargain is made otherwise than at arm's length’ or not, when it is available to everyone. If it is not a bargain otherwise than at arm’s length, the CGT acquisition cost of the airdropped tokens would be Nil.
If when the smart contract is executed, the airdropped tokens are issued directly to the recipient, it will be Nil acquisition cost. As there is no corresponding disposal, the market value rule at Section 17 TCGA 1992 is disapplied and the actual amount paid for the airdrop (ie Nil) is the CGT acquisition cost where it is lower than the market value at the date of receipt).
Recap has been designed from the ground up to work out the capital gains impact of airdrops.
- 1.Simply connect your exchange accounts or wallets through our automated integrations or enter your data manually via the user interface or CSV file.
- 2.Recap's default position is that it treats taxable and non-taxable airdrops as an acquisition of cryptoassets based on their GBP market value. All GBP valuations of the assets are determined by Recap's own market valuation engine using both foreign and cryptocurrency exchange rates. If you consider that your non-taxable airdrop should be treated as a Nil acquisition cost, please use the manual price over-ride to rectify this. There are no taxable events until the cryptoassets are later sold.
- 3.See the acquisition cost of every airdrop (example below) in the tax tab
