Airdrops serve dual purposes – promoting new projects and rewarding loyal holders. They’re considered highly effective promotional tools for emerging crypto ventures, generating awareness and attracting early supporters.
But what about their tax implications in Australia? The Australian Taxation Office (ATO) keeps a watchful eye on these digital windfalls.
In this article, we will explore the fundamentals of crypto airdrops and delve into the taxation aspects of these events, as per the ATO guidelines. Whether you’re a crypto enthusiast or just beginning your journey in the digital currency world, understanding ATO airdrops is essential.
Understanding Crypto Airdrops
Crypto airdrops are popular marketing tools wherein free tokens or coins are distributed to promote digital assets. This tactic aims to increase their popularity and usage.
Airdrops involve sending coins or tokens to wallet addresses at no cost.
To qualify for accessible assets, users often register or complete online tasks. In some cases, assets are auto-distributed to token-holders, meeting a minimum balance on the relevant blockchain.
How Are Crypto Airdrops Taxed In Australia?
In the Australian crypto tax regime, the taxation of airdrops, as per the ATO, is a topic of interest for many cryptocurrency enthusiasts. Airdrops, often seen as unexpected windfalls in the crypto world, have tax implications, and understanding these rules is crucial, especially for beginners.
Generally, airdrops are considered ordinary income. When you receive them, you must pay income tax based on the tokens’ fair market value (FMV).
Calculating the income tax you owe is relatively straightforward. It would help if you determined the FMV of the airdropped crypto on the day you receive it and apply your applicable income tax rate.
However, there is an exception to this taxation rule for initial airdrop allocation. According to the ATO, these specific airdrops are not regarded as ordinary income upon receipt because they have not been traded before. This makes them essentially tax-free.
In such cases, the cost basis for these tokens is either the amount you paid for them or zero if you obtained them at no cost.
When you decide to sell, trade, spend, or gift the airdropped coins or tokens, the ATO treats these transactions as regular capital gains events. You might be subject to capital gains tax, considering you’ve made a profit. If you incurred a loss, you must report it as a capital loss.
However, certain situations may require expert guidance due to the evolving nature of the crypto landscape.
How To Calculate Tax On Airdrops In Australia?
If you are wondering how to calculate the ATO airdrop tax in Australia, we’re here to help simplify the process.
Determining The Market Value Of Established Coins
First and foremost, it’s crucial to determine the market value of the crypto you received when you received it. It will only be calculated for established coins. This market value will be added to your ordinary income and will be taxed as per the ordinary tax rates in Australia.
Taxation Of Initial Allocation Of Australia
Initial allocation airdrops don’t have immediate tax implications upon receipt. That means you will not be liable for any tax implications if you have received the airdrop without any trade or for free.
However, you must record the date of receipt and whether any payment was made to acquire them initially. If you received them for free, note the cost base as zero, and if you paid some amount to receive the airdrop, that amount becomes your cost basis.
Calculation Of Capital Gain Tax
If you eventually sell any of these airdropped tokens, you will be liable to pay capital gain tax on your profit. To calculate tax on crypto gains, determine your cost basis, which includes the original price, transaction fees, and fair market value of the airdropped token.
Use the below formula to calculate your capital gain.
Capital gain = Disposal price (FMV) – Cost basis
Real Life Scenario
Airdrops With Zero Market Value
Betty received an airdrop of 3,000 tokens as an initial allocation. Since these tokens are being issued for the first time, their value at the time of receipt is AUD 0.
These tokens won’t be subject to any tax at this stage because it’s considered an initial allocation, and they have no taxable value yet.
Airdrops With Fair Market Value
Rob received an airdrop of 5,000 Arbitrum (ARB) tokens, whose value at the time was AUD 8,000.
For tax purposes, the AUD 8,000 (the FMV) will be considered ordinary income and subject to income tax.
A year later, the value of these tokens increased to AUD 30,000, and Rob decided to sell them, making a profit.
Now, Rob will be subject to CGT on the sale of these tokens. The capital gain is calculated as the difference between the selling price and the initial value:
Capital gain = AUD (30,000 – 8,000) = AUD 22,000.
Here’s the tax calculation:
- There’s no tax for the first AUD 18,200.
- The remaining AUD 3,800 is subject to a 19% tax rate: 3,800 * 19% = AUD 722.
However, Rob can avail of a 50% discount on this tax because he held the tokens for over a year. So, the final tax liability is 50% of AUD 722, i.e., AUD 361.
Note: Rob qualifies for the 50% discount due to holding the tokens for more than a year, which reduces his tax liability.
Airdrops are generally considered taxable income when an individual or entity receives them in return for providing services or for no consideration. This means you must declare the fair market value of the airdropped tokens as income on your tax return in the financial year you received them.
You may also be required to pay capital gains tax (CGT) on the airdropped tokens if you dispose of them at a profit. So, it’s essential to record the airdrop values at receipt and report them to the ATO to comply with Australian tax laws.