Table of Contents
What is an Airdrop?
From HMRCs CRYPTO21250 Crypto assets manual:
An airdrop is where someone receives an allocation of tokens, for example as part of a marketing or advertising campaign in which people are selected to receive them. Other examples of airdrops may involve tokens being provided automatically due to other tokens being held or where an individual has registered to become eligible to take part in the airdrop.
Why are Airdrops given?
Most airdropped coins are given to crypto investors as part of a marketing campaign. Normally to get some buzz going or to reward early investors as a gift for their loyalty. There are a host of other reasons too, including:
- Creating publicity and awareness of a new coin/token.
- Rewarding investors for carrying out a task
- Creating communities surrounding a project
- Strengthening a community project by having the airdropped coin traded
Scam Airdrops
Inevitably, when something is given out for free, there will also be opportunists waiting in the wings.
Quite often when you look into your various wallets, you’ll see tokens/coins ending in .io or .net or similar.
These are worthless scam coins. They also normally contain a web address. These web addresses go to fake websites which will ask you to purchase said coins or tokens.
Though, sometimes these web pages can contain phishing scams. These websites will ask the user to connect their wallet to retrieve coins. Though in reality, they are emptying out your wallet.
Another popular tactic is to emulate or spoof legitimate websites or coins by tricking the user into believing they are purchasing a genuine coin or token, when in fact they have purchased absolutely nothing from a scammer. Very common when a genuine token has dropped. You’ll find tokens with a very similar name such as in the case of Arbitrum, where fake twitter accounts were created to mimic the authentic twitter account.
How are Airdrops taxed?
Airdropped coins and tokens are considered either taxable or non taxable. This depends on whether the individual carried out an activity to receive the airdrop.
Taxable airdrops
Airdrops are viewed as taxable income if they are received in return for the individual performing a service or doing something to justify receiving the token. These activities can range from social media engagement, quiz or survey participation, being active on a coins telegram chat, KYC verification, etc.
If taxable, the market value of the airdrop at the date of receipt should be recorded on the tax return under miscellaneous income, (normally box 17 on the SA100 under Other UK income ). The amount of tax to pay will depend on whether the individual is a basic rate, higher rate or super rate tax payer.
Example:
Non taxable airdrops
Non taxable airdrops are essentially tokens that have been received without doing anything to ‘earn’ them. Meaning, that they weren’t part of a trade, no social media engagement, no surveys were participated in, etc. You received the crypto without doing anything in return. When this occurs, there is no income tax or national insurance due on the received crypto.
Example:
Capital Gains Tax on Airdrops
If you have received a coin or token which then gain in value before you later dispose of them, this will be seen as a taxable event, subject to Capital Gains Tax (dependent on the gain).
The same applies if you swap the coin for other crypto, or you spend it or you gift the crypto (not including your spouse).
The value of the coin between when you received it and when you dispose of it will be the gain. If this gain exceeds the annual allowance, then Capital Gains Tax will be due.
The allowance for the 2023-2024 tax year is £6,000, which will drop further to £3,000 in the 2023-2024 tax year.
This will be taxed at either 10% or 20%, dependent on your tax rate band.
Summary
Dependent on your activity levels concerning the received crypto, you may either pay income tax (along with Class IV national insurance) and CGT (if crypto is disposed at a gain) if you carried out an activity or just CGT (if crypto is disposed at a gain) if you did not perform a task.
If you’d like help completing your Crypto taxes, you can contact us here.
Alternatively, you can send us an email at: info@cryptouktax.co
