What is an Airdrop & How is it Taxed?
A popular marketing stunt from cryptocurrency startups, crypto investors love airdrops - but did you know they’re taxed? Learn about airdrops and how they’re taxed where you live.
What is an airdrop?
In the cryptocurrency world, an airdrop is when a coin or token is sent to a variety of wallet addresses, free of charge.
Many investors can be dubious about the security or safety of them. Airdrop scams do exist, just like other crypto scams, but the majority of airdrops are safe - especially when partnered with legitimate exchanges. There's a very good reason airdrops happen quite regularly - it's a great way for crypto startups to get noticed.
There are a lot of reasons cryptocurrency startups use airdrops. Most often, it’s as a part of a marketing campaign. Some common reasons crypto startups use airdrops is to:
- Raise awareness of a new coin/token.
- Reward early investors and attract new investors.
- Decentralize token distribution.
- Reward investors for completing a task, like sharing a social media post.
- Help create value for a new coin/token through increased trading.
- Learn more about investors.
In general, crypto traders love airdrops as they’re essentially free money, especially if the value of the new coin or token increases.
Example
Uniswap made an airdrop of UNI tokens to all wallets that had made at least one transaction on its platform by September 2020. While most investors quickly sold the 400 UNI tokens, those who held them have been rewarded as the token price has soared from around $2 to $25.
While airdrops themselves are free, crypto investors should be aware that airdrops may be subject to tax.
Crypto airdrop taxes: Income tax
How an airdrop is taxed depends on where you live and sometimes even the reason you received the airdrop. Some countries like Canada and Germany see receiving an airdrop as a tax free event, but this is the exception rather than the rule.
Instead, most countries including the USA, Australia and the UK have taken a harder stance. Typically, tax authorities view airdrops to be a type of income - like a bonus - which makes them subject to Income Tax.
Crypto airdrop taxes: Capital Gains Tax
Like any other asset, when you sell coins/tokens you got from an airdrop, this will be subject to Capital Gains Tax. So in some countries, you’ll be paying tax twice on an airdrop!
The cost basis of your airdropped coins is their FMV on the date you received your airdrop.
We’ll dive into how each country deals with airdrops. Skip ahead to find your country’s airdrop tax rules.
How are airdrops taxed in the USA?
The IRS has given clear guidance on how airdrops are taxed in America.
In: Income Tax
They consider airdrops to be a type of income, so you should pay income tax on any coin or token received from an airdrop. Use the fair market value (FMV) of the coin on the day you received them to figure out how much income you received. This should be reported as “other income” on Form 1040 Schedule 1.
Out: Capital Gains Tax
If you’re selling coins received from an airdrop, this will be subject to Capital Gains Tax. You can use the same calculation above to figure out your cost basis, then subtract this from the amount you sold them for to calculate your capital gains. This is reported on Form 8949.
Find out more about how America taxes cryptocurrency in our updated American Crypto Tax Guide.
Example
You receive 400 UNI tokens on the 1st of September 2020. The FMV of UNI tokens that day is $2.
$2 x 400 = $800.
You report $800 of other income on Form 1040 Schedule 1.
You sold your UNI tokens 6 months later. The FMV of UNI tokens that day was $10, so you made $4,000. You already know your cost basis was $800 from your previous calculation.
$4,000 - $800 = $3,200.
You report a capital gain of $3,200 on Form 8949.
How are airdrops taxed in the UK?
The HMRC has some very clear guidance on Income Tax on airdrops. Whether you pay it depends on the reason you received the airdrop.
In: Income Tax
Airdrops are considered income when you’ve done something to earn them. This could include being rewarded due to existing trades or receiving an airdrop for performing a given action, like sharing a social media post.
Airdrops are not considered income if you receive them without providing some kind of service or action in return.
To further complicate things, if you’re considered a trader - in that your main source of income is crypto investments - then you’ll be subject to Income Tax on airdrops even if you did nothing in return.
Out: Capital Gains Tax
When you sell coins or tokens that you received from an airdrop, if you have a capital gain this will be subject to Capital Gains Tax.
In the UK, you report both income and capital gains on your Self Assessment Tax Return. You can also report your capital gains in real-time through the Capital Gains Tax Service.
Find out more about how the UK taxes cryptocurrency in our updated UK Crypto Tax Guide.
Example
You receive 200 UNI tokens on the 1st September 2020, with a FMV of £2 at the time of receipt. You received these tokens because you had conducted trades on the Uniswap platform prior to this date. This means your UNI tokens are subject to income tax.
£2 x 200 = £400. You report £400 of income on your Self Assessment Tax Return.
You sell your UNI tokens at £5 a few months later, so you made £1,000. These are subject to Capital Gains tax. Your know your cost basis from the calculation above.
£1,000 - £400 = £600. You report £600 in Capital Gains in your Self Assessment Tax Return or through the Capital Gains Tax Service.
How are airdrops taxed in Australia?
ATO have released updated guidance around how they view airdrops. In most instances, like if you've received airdrops as part of a marketing campaign, the ATO say your airdrop will be considered ordinary income and subject to Income Tax upon receipt. As well as this, if you make a capital gain when you sell coins or tokens from an airdrop, this is subject to Capital Gains Tax.
However, there is one specific exception to this rule, for initial allocation airdrops. In this instance, the ATO says that these would not be considered ordinary income, or a capital gain, upon receipt. However, disposing of these tokens would later be subject to Capital Gains Tax. Where you've paid nothing to receive these tokens, the cost basis for the new coins is zero. Where you have paid to receive these tokens, this figure would be your cost basis.
In: Income Tax
Most airdrops, excluding initial allocation airdrops, are considered income in Australia. Aussie taxpayers will report income and capital gains under the same Individual Tax Return Form, which you can do online with MyTax.
Out: Capital Gains Tax
When you sell coins or tokens that you received from an airdrop, if you have a capital gain this will be subject to Capital Gains Tax.
Both income and capital gains are reported in the Individual Tax Return Form, which you can do online with MyTax.
Find out more about how Australia taxes cryptocurrency in our updated Australian Crypto Tax Guide.
Example
You receive 300 1INCH tokens from an airdrop. On the day you receive them, the FMV per token is $3.5. Your tokens are subject to Income Tax, so you need to calculate their total worth.
$3.5 x 300 = $1,050. You report $1,050 of income on your Individual Tax Return Form.
You sell your 1INCH tokens a couple of days after. The FMV per token is $4, so you make $1,200. You can use the calculation above as your cost basis.
$1,200 - $1,050 = $150. You report a capital gain of $150 on your Individual Tax Return Form.
How are airdrops taxed in Canada?
The Canada Revenue Agency doesn’t view airdrops as a type of income, provided you’re trading on an individual level and not as a cryptocurrency business. When you sell an asset you received through an airdrop, this would be subject to Capital Gains Tax.
It’s important to note that because CRA uses the adjusted cost basis method, we’d calculate our cost basis differently than in the other examples. As there is no cost involved in receiving an airdrop, the entire sale is subject to Capital Gains Tax.
Capital gains in Canada are reported on a Schedule 3 Form. You can do this online.
Find out more about how Canada taxes cryptocurrency in our updated Canadian Crypto Tax Guide.
Example
You receive 200 1INCH tokens from an airdrop. The FMV of the token that day is $3. Your tokens are not subject to Income Tax as you’re not trading as a business.
You paid nothing for the asset, so your cost basis is $0.
You sell your 1INCH tokens two months later for $4, so you made a total of $800. To calculate your capital gains, subtract your cost basis from the sale price.
$800 - $0 = $800. You report a capital gain of $800 on your Schedule 3 Form.
How are airdrops taxed in Germany?
Unlike our last three countries, airdrops in Germany aren’t considered income by BZst. They’re seen as more akin to a lottery win and therefore they aren’t subject to Income Tax.
In even better news, because there is no purchase transaction for an airdrop, they also can’t be considered as subject to Income Tax at the point of a subsequent sale. So both receiving airdrops and selling the asset later on is tax free in Germany.
Find out more about how Germany taxes cryptocurrency in our updated German Crypto Tax Guide.
How are airdrops taxed in other countries?
As you can see, the tax treatment of airdrops varies a lot depending on where you live. To make things even more confusing, many countries have issued no specific guidance on the tax treatment of airdrops, so often crypto investors are left guessing.
In general, you should try to follow your country’s guidelines about other types of crypto transactions. In particular, if coins from a fork are considered as a form of income, it's likely that airdrops would be as well.
How does Koinly calculate airdrop taxes?
You can simplify airdrop taxes, and crypto taxes in general, by using Koinly crypto tax calculator. Koinly does all tax calculations for you, based on where you live. All you need to to is tag your airdrop transactions and Koinly will calculate your cost basis and any subsequent capital gain from a sale.
If you live in a country where airdrops are treated as income, you can head into the settings page of your Koinly account and turn "treat airdrops as income?" on. Koinly will then calculate the Income Tax for airdrops and add them to your income report.
You're also able to tell Koinly which deposits - that is, crypto coming in to your account - was income from sources like airdrops, mining, staking and so on.
To do this, select the transaction in question and simply tag any airdrops, staking rewards, mining and forks. Koinly does this automatically in most cases but sometimes the data imported may not tell Koinly that a transaction is an airdrop deposit.
Once everything is correct, go ahead and download your crypto tax report from the Koinly Tax Reports page. Koinly offers a number of different tax reports to choose from. At tax time, you can submit your report to your accountant, invite your accountant to view your Koinly profile, or file your taxes yourself.
Summary
- An airdrop is when you receive new coins/tokens for free.
- Crypto startups use airdrops to promote new currencies.
- The tax treatment of airdrops depends on where you live.
- Often, airdrops are thought of as a bonus and subject to Income Tax.
- They'll also generally be subject to Capital Gains tax when you sell coins from an airdrop.
