Received an Airdrop: What does this mean for your tax?

Many investors may not realise that airdrops come with tax implications. In this article, we'll dive into the world of airdrop taxation according to the Australian Taxation Office (ATO) and provide some tips. Whether you're an experienced crypto trader or just starting, understanding airdrop taxation is crucial for making informed financial decisions.

The ATO has taken a few approaches regarding airdrops (as of this writing in August 2023), and they depend on the situation.

Initial allocation airdrops

This is where a crypto project makes an initial airdrop that is its genesis distribution (i.e., they have not previously been traded on an exchange or valued on a crypto market website).

The ATO believes this is the only situation where it is not considered ‘income’, and as such, there are no initial tax implications when the airdrop is received.

If you receive initial allocation airdrops, it is not treated as a capital gain or ordinary income. The cost base (i.e. purchase price) is $nil, and when you eventually dispose of the airdrop is when you finally realise the capital gain or profit and pay tax accordingly.

Paid airdrops

This is where someone has been allocated a portion of an airdrop but needs to pay something for the allocation.

In this case, there is no tax liability, however, you should keep track of the value paid for the tokens as this will form the cost base of the newly acquired tokens, and will be used when the tokens are disposed of.

Taxable airdrops

Other airdrops with an existing supply of tokens have been trading for a time. The ATO considers these types of airdrops to be income at the time received and at market value.

A common challenge investors face arises when they receive airdrops at a significantly higher value, only to later dispose of them at a substantially lower price.

This situation presents two tax implications: firstly, the airdrop is declared as income, leading to a tax liability; secondly, the acquisition of the digital asset is subject to Capital Gains Tax (CGT).

The issue can worsen when, at a later date, the digital asset is sold at a loss, resulting in a capital loss. Unfortunately, this unfavourable outcome means that investors have to pay initial taxes at a higher price, without the ability to offset any of the initial income.

This is an unfortunate issue with our current tax system and doesn’t just impact airdrops but extends to situations such as Employee Share Schemes and Dividend Reinvestment Plans as well. The issue is unfortunately magnified due to the volatile nature of crypto.

One way to mitigate some of the impact of the tax liability that comes with the initial airdrop is to sell a portion of the airdrop to pay for the tax liability. This will, however depend on your own personal tax situation, so contact us before doing so!

Another way to take advantage of the potential capital loss when the airdrop is disposed of is to dispose of some other tokens in a capital gain position so that at least it is offset by the airdrops sold. Again, this will depend on your personal tax situation, so don’t rely on this statement as gospel and please contact us before doing anything if you think this may be a useful strategy!

Airdrops can be a valuable and exciting aspect of the crypto world, but they also come with significant tax implications that must be considered. At Consensus Layer, we are well-versed in the intricacies of crypto taxation and are committed to helping you navigate the complexities to optimise your tax position. Our team of crypto tax specialists is here to provide personalised advice and expert guidance tailored to your unique circumstances.