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Token Upgrades/Swaps
Here are three common scenarios arising for token upgrades/swaps. Let's use an example to consider the scenarios and their possible tax effect.
Token A is upgraded to a newer version of that Token (let's say Token A v2).

Airdropped upgrade

The new Token A v2 will often be airdropped via a second smart contract. The original Token A may or may not continue to exist alongside the new Token A v2.

Possible tax treatment

There is no specific HMRC guidance on the consequences of a token upgrade, but there is some guidance on transferring tokens between distributed ledgers at CRYPTO22110.
The specific circumstances of each occurrence need to be examined and it is recommended you seek professional tax advice on the tax treatment.
It is possible the acquisition cost of the original Token A should apportioned between the original Token A and the new Token A v2, pro-rata, in accordance with the market value of each token at the date of the upgrade.
If the original token becomes worthless at the date of the upgrade, then all of the acquisition cost will be moved over to the new token.

Upgrade mechanism

You are required to send the original Token A to a certain address via a second smart contract. More often than not, the original Token A will get burned (destroyed). Under the second smart contract you receive the new Token A v2.

Possible tax treatment

There is no specific HMRC guidance on the consequences of a token upgrade, but there is some guidance on transferring tokens between distributed ledgers at CRYPTO22110.
The specific circumstances of each occurrence need to be examined and it is recommended you seek professional tax advice on the tax treatment.
It is possible the acquisition cost of the original Token A will be moved over to the new token, since the original token no longer exists.
However it is possible HMRC may treat this as a disposal of the original token A for capital gains tax purposes.

Redenomination upgrade

An alteration is made to the smart contract underlying the original Token A and it is also renamed Token A v2.

Possible tax treatment

There is no specific HMRC guidance on the consequences of a token upgrade, but there is some guidance on transferring tokens between distributed ledgers at CRYPTO22110.
The specific circumstances of each occurrence need to be examined and it is recommended you seek professional tax advice on the tax treatment.
It is possible the acquisition cost of the original Token A will be moved over to the new token, since the new Token A v2 has replaced the original Token A.
Last modified 1mo ago