What is an airdrop
Airdrops have become a popular way for companies to distribute their tokens to holders of crypto. Airdrops are commonly used for two main reasons:
- as a promotional tool to increase awareness of new crypto projects
- to reward holders of an existing crypto
Sometimes it is difficult to convince users to purchase or use a token in its early stages. Airdrops are particularly popular as a promotional tool to raise the initial awareness and gain early traction in a project.
Airdrops are planned and the distribution of tokens is usually based on specific criteria, such as holding a certain amount of crypto in an address or participating in the project in some way.
Some airdrops may require the receiver to perform a task to qualify for the airdrop, such as making a social media post, or following the project’s Twitter account.
When airdrops are used as a promotional tool, they are often entirely unsolicited and require no action. This means you can easily end up with airdrops that you never asked for 😲, and in some cases that can cause a tax liability in Australia.
Uniswap is an example of an airdrop where users received a token that had real value. Uniswap airdropped 15% of the original supply of UNI to addresses that interacted with the Uniswap protocol prior to 1 Sep 2020.
For anyone who interacted with the Uniswap protocol, they were able to claim 400 UNI. The full details of the airdrop can be found on the Uniswap blog.
There was no timeframe for claiming the 400 UNI, so the value of the airdrop varies depending on when it was claimed. If the UNI airdrop was claimed on 17 Sep 2020, then the value at the time was around $1,900 AUD.
UNI is an example of an airdrop that is worth claiming if you were eligible at the time.
Difference between an airdrop and a chain split
An airdrop is when you receive a token on an existing blockchain, often it’s due to the launch of a new project. In contrast, a chain split is the creation of a new asset by duplicating an existing blockchain.
Chain-splits and airdrops are two structurally different events, and the corresponding tax treatment in Australia is also different.
Chain splits (also known as forks) occur when a new version of a blockchain is split from an existing blockchain. You can tell a chain split has occurred, as each chain is operating a different version of software code.
A chain split can occur when:
- some miners do not follow the software upgrade to an existing chain
- there is disagreement between miners on which software upgrade to support
- a new cryptocurrency is being created using an existing chain as the starting point
A chain split results in the creation of a new blockchain that shares a transaction history in common with the original blockchain up to a certain block number, after which the two blockchains diverge.
When a chain split occurs, it also results in the creation of new cryptocurency asset.
While airdrops and chain splits both result in investors receiving new crypto, the motivations and mechanisms behind them are different. We’ll see that the tax treatment can also be different.
The ATO have issued guidance on the Australian tax treatment of chain splits for investors.
Are airdrops taxable
The ATO has issued guidance on the tax treatment of airdrops. The ATO has made a distinction between two different types of airdrops:
- airdrops of an established cryptocurency
- airdrops of new tokens - referred to as Initial allocation airdrops
Airdrops of an established cryptocurrency
An established cryptocurrency is crypto asset that has a known, non-zero, market value.
Airdrops of an established crypto are taxed as ordinary income in Australia, based on the value of the crypto at the time you receive it.
So if you received an airdrop of an established cryptocurrency, you will have to report the market value of the crypto received in your income tax return as ordinary income. You’ll report the market value of the airdropped crypto in Australian dollars, at the time you receive it.
The market value of the crypto received will then become the cost base for that crypto going forward. So when you do eventually decide to sell the airdropped crypto in the future, you would calculate capital gains tax on that sale.
We’ll run through an example for you shortly.
Initial allocation airdrops
An initial allocation airdrop is not taxable in Australia. You’ll only pay tax when you later sell or otherwise dispose of the airdropped tokens.
The ATO provides a general description for what is an Initial allocation airdrop:
💡 Initial allocation airdrop
The very first distribution of crypto tokens that may be made by a new crypto project, which have not been traded prior to the airdrop.
Although the airdrop itself is not taxable, the airdropped tokens will be taxed when you later sell or dispose of them. If you are an investor, then the airdropped tokens would be subject to Capital Gains Tax (CGT).
To calculate the resulting CGT when you sell your airdrops, you’ll need to know the cost base. The cost base of an initial allocation airdrop can be determined as:
- If you have received them for free, the cost base will be zero.
- Where you have inccurred a cost for receiving the crypto, the cost base of the crypto will be amount that you paid to acquire them.
The guidance on initial allocation airdrops is relatively new and it’s yet to be seen what crypto airdrops the ATO would consider to be initial airdrops and which are airdrops of established crypto.
How to calculate tax on airdrops
As airdrops of an established crypto are taxed as ordinary income, it is important to keep proper records when you receive these type of airdrops.
You will need to determine the market value of the crypto at the time you receive it. The market value of the airdropped crypto can be obtained as the price reference from a major digital currency exchange or other reliable source of pricing information.
It’s important to accurately determine the market value of the airdropped crypto, on the date they were received. The market value of the airdropped crypto will be declared as assessable income in your income tax return.
In Australia, there is no fixed tax rate for crypto, so the actual amount of tax you will pay on a crypto airdrop will depend on your marginal tax rate according to your taxable income for that income year.
The market value recorded for the airdrops of established crypto becomes the cost base of those tokens going forward. If you’re an investor, you’ll have to calculate capital gains tax when the airdropped crypto is later sold.
Initial allocation airdrops have no tax implications when you receive them, however, you must make sure to record the date when they were received and whether any payment was made to receive them in the first place.
Initial allocation airdrops are often received for free, in which case the cost base would just be recorded as zero.
When you later sell the airdropped tokens, the difference in the sale price and the purchase cost would be your capital gain for that year and included as assessable income in your income tax return. The amount of tax you pay on initial airdrops would be dependent on your personal marginal tax rate.
Do I pay tax when I sell my airdropped tokens
All crypto airdrops (including initial allocation airdrops) are taxable when they are sold or disposed. For investors, the sale of an airdropped token will result in a CGT event, just like the sale of any other cryptocurrency asset.
The sale will result in either a capital gain or capital loss, depending on the cost base of the airdropped tokens, when you received them.
Let's look at an example:
💡 Crypto airdrop of an established crypto token - Investor
On 5 July 2021, you are airdropped 10 ABC tokens into your account as a result of previously holding 50 KLM tokens since 20 November 2020.
The value of the airdropped tokens must be declared as ordinary income in the financial year when the airdrop occurred. The value can be calculated as the price of the token multiplied by the quantity of tokens received.
The price of the ABC tokens at the time when the airdropped tokens are actually received is $3.30 per token. The market value of the airdrop is 10 x $3.30 = $33.
Ordinary income = $33
The ordinary income of $33 would be recorded as assessable income when you prepare your tax return for the 2022 financial year.
The cost base of the 10 ABC tokens is also recorded, for when the tokens are later sold at some point in the future. The total cost base for the 10 ABC token is recorded as $33 (or $3.30 per token).
On 15 February 2022, you decide to sell your 10 ABC tokens for $11.55 each.
The net proceeds from the sale:
Net proceeds ⇒ $11.55 * 10 = $115.50
The cost base of the sold tokens is:
Cost base ⇒ $3.30 * 10 = $33
The net capital gain for the disposal of 10 ABC tokens is determined by subtracting the cost base from the net proceeds:
Net capital gain ⇒ $115.50 - $33 = $82.50.
Because the 10 ABC tokens were held for less than 12 months, you would not be eligible for the 50% CGT discount. This means that the full $82.50 will be declared as assessable income in your 2022 income tax return.
Use Syla to automatically identify and classify airdrops for tax
Calculating market values and recording cost base of crypto is complicated and time consuming. It’s much easier to use crypto tax software to keep track of everything and to ensure there are no mistakes in the tax calculations.
You can automatically identify and classify your airdrop transactions using Syla. Using Syla makes calculating crypto tax simple and helps to minimise your tax:
- import your crypto transactions and airdrop events into Syla
- automatically identify and classify known airdrops
- optimise for the lowest tax outcomes based on Australian tax law
- download your Crypto Tax Report for your tax agent or use it yourself to lodge your tax return in myGov.
You can get started in Syla for free.
- Airdrops of an established crypto are taxable as ordinary income at their market value when received.
- Initial allocation airdrops are not taxed at the time they are received.
- Investors who receive an airdrop of an established crypto or initial allocation airdrop, will still have to calculate capital gains when the airdropped tokens are later sold.