Crypto Tax: Airdrops - don't get caught out at tax time!

So you've received a few airdrops in recent times and they're worth a few hundred dollars, maybe a few thousand, maybe they're worth $8.25M like one lucky $RARE recipient, but what does it mean when it comes to your crypto tax obligations?

Airdrops involve the distribution of digital tokens that underpin a crypto platform to numerous blockchain wallet addresses. Airdrops can be an effective marketing tool and are most commonly used by new projects to create awareness and to incentivise crypto participants to use their platform. They are also popular amongst existing projects as a way to reward early adopters of their platform and can play a critical role in the decentralisation of a project which involves the project’s founders distributing governance tokens (which have attached voting rights) to their community, essentially taking control away from the founders and placing it in the hands of the project’s community. Receiving an ‘airdrop’ in the traditional finance world would be comparable to Uber rewarding its first 10,000 riders with a portion of the company’s shares.

Notable airdrops

Project: Uniswap ($UNI) - Decentralised Exchange (DEX)

Uniswap, a DEX for swapping cryptocurrencies, launched its governance token, “UNI”, in September 2020. The airdrop saw wallet addresses that had interacted with Uniswap’s platform before 1 September 2020 receive 400 UNI tokens each, which represented 15% of the total token supply. At the time of writing this article the market value of this airdrop is worth $12,000 USD per address. A generous reward for merely interacting with a crypto protocol.

Project: SuperRare ($RARE) - Non-fungible token (NFT) Trading Platform

SuperRare, an NFT marketplace, launched SuperRare 2.0 with an airdrop of its governance token, “RARE”, in August 2021. The airdrop saw 150 million tokens (or 15% of supply) distributed to NFT artists, collectors and traders who had previously used the SuperRare platform, with the size of each user’s airdrop determined by how active they were on the platform. One address received 4.43 million RARE tokens and at the current market value of $1.87 USD per token, this active SuperRare user’s airdrop is worth more than $8.28M USD. Although the size of this one particular user’s airdrop far surpasses the majority of the individual RARE airdrops received, there were numerous users that were rewarded with hundreds of thousands of dollars worth of RARE tokens.

Tax implications of airdrops

Although airdrops are not a new feature of the crypto ecosystem, they have become more prevalent in recent times as the crypto market has seen explosive growth and development over the last 18 months, putting them on the radar of the Australian Tax Office (ATO). According to the ATO, airdrops are treated as ordinary income at their market value at the time they are received, meaning a taxable event occurs regardless of whether you have sold the token. The airdrop is then treated as a capital asset where the cost base is recorded at its market value at the time the tokens were received. When the tokens are sold, a capital gain or loss will be realised, calculated as the difference between the sale price and the token’s cost base.

Our thoughts

As the two examples above demonstrate, airdrops can be quite material in value and we believe the ATO needs to give further consideration to their current stance on the taxation of these events. It also raises further questions as to whether the current tax treatment of airdrops is fair for Australian investors and crypto enthusiasts. For one, users are often unaware they are eligible for an airdrop until it has already been issued and they have no control over the value of the airdrops they are eligible for nor the timing they receive them, making planning from a tax perspective difficult for these events. Many investors are also often blissfully unaware that they have even been the beneficiary of an airdrop as digital wallets often require their owners to manually add tokens before their balances are displayed.

Perhaps one of the biggest pitfalls of the ATO’s current stance on the taxation of airdrops is that given the volatility of the crypto markets, it is common to see the value of an airdrop lose value after being received, and under the current guidance from the ATO, a taxpayer would need to pay tax on the value of the airdrop when it was received even though it may now be worth considerably less. Further, as the ATO treats the income derived on receipt of the airdrop as ordinary income but the sale of the assets as a capital disposal, any loss generated on the sale cannot be applied against the initial income as capital losses cannot be used to offset ordinary income. This particular scenario can leave investors in an unfortunate position as they are left paying tax on a much higher value than the proceeds they actually receive from the sale of their tokens.

As Australian crypto accountants, we see the tax treatment of airdrops as just one of the many important crypto-related tax issues the ATO needs to consider in more depth. We believe slight changes to the ATO’s guidance can create fairer tax outcomes for crypto investors. For example, the first taxable event for an airdrop could be recognised when a user disposes of their tokens, resulting in a capital gain event where the cost base of the airdrop would be $0. In this instance, a taxpayer is protected if the token loses its value after the airdrop is issued and allows the taxpayer to be in control of when they wish to recognise a taxable event.

As crypto accountants, Tax On Chain aims to collaborate with accounting bodies such as Chartered Accountants Australia and New Zealand (CAANZ) to work with the ATO in delivering fair and logical crypto tax legislation.

It takes a crypto tax accountant with specialist knowledge in blockchain and cryptocurrency to ensure you are meeting your reporting obligations. If you are unclear as to what your crypto tax obligations are, get in touch with our team of expert crypto accountants today.

Written by Australian Crypto Tax Accountants: Rafael Franco & Oliver Woodbridge

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