This month, IRD finally published guidance regarding the taxable treatment of airdrops.
What is an airdrop?
An airdrop is a distribution of tokens without compensation (i.e., for free), generally with a view to increasing awareness of a new token, particularly amongst influencers, and increasing liquidity in the early stages of a new token project.
Depending on circumstances, an airdrop may be taxable in the following ways:
- On receipt (when they are received)
- On disposal; or
- On both receipt and on disposal
Receiving an airdrop is a taxable event if you:
- have a crypto business (if airdrop is received as an ordinary incident of the way in which the business earns its income);
- acquired the cryptocurrency as part of a profit-making undertaking or scheme
- provided services to receive the airdrop (and the cryptocurrency are payment for the services you provided)
- receive airdrops on a regular basis such that the airdrops have the hallmarks of income.
In other cases, receiving an airdrop is not a taxable event.
In most cases, a disposal of an airdrop will be taxable. The profit is equal to the sale value less the purchase value. The purchase value will depend on the circumstances outlined above. For example, if the airdrop is not a taxable event, the purchase value is $0 (and on disposal, the full sale proceeds will be taxable).
Case study 1
Jim, a cryptocurrency investor, used the decentralized exchange ‘uniswap’. He became eligible to claim 400 UNI tokens. This was a one-off airdrop, and Jim did not provide any service or engage in any scheme to become eligible for it. Therefore, the airdrop is not taxable on receipt.
Jim then swaps the 400 UNI for Bitcoin on 20/9/21. The value of 400 UNI on that date was NZD$ 3,372.73. The airdrop is taxable on disposal, amounting to NZD$ 3,372.73 in the 2022 Financial Year.
Case Study 2
Karen locked up 20,000 Cardano (ADA) in a decentralized protocol so that she could become eligible for future airdrops from that protocol. One such airdrop was the XYZ token. On 1/2/21, 300 XYZ was airdropped into her wallet, valued at NZD$ 500 on that date.
Locking up the ADA tokens constitutes an undertaking or scheme because it was a series of steps directed to an end result: becoming eligible for the XYZ token. The scheme was carried out for the dominant purpose of making a profit. Therefore, the airdrop is taxable income on receipt amounting to NZD$ 500 in the 2022 Financial Year.
On 1/5/22, Karen sold the 300 XYZ token for NZD$ 100. This disposal is a taxable event and Karen incurred a taxable loss of NZD$ 400 in the 2023 Financial year.
Contact Tim Doyle for a call or meeting to discuss any cryptocurrency tax or accounting questions. Our office is in Cambridge, Waikato, or we can arrange a video conference call.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.