KoinX - Crypto taxes simplified | Product Hunt

Are You Liable To Pay Tax On Crypto Airdrops In UK

Have you received an airdrop recently and wondering what tax implications you may face? Read this guide to clear your doubts!

Did you complete an online task to get some crypto as a reward? This reward is called an airdrop. Any airdrop received by you may have tax implications in the United Kingdom (UK). Let us understand how a tax on crypto airdrops in the UK works.

The UK tax laws consider crypto as assets. So any transaction involving crypto does attract either capital gain tax or income tax in the UK. His Majesty Revenue and Customs (HMRC) which is responsible for collection of taxes in the UK, has categorized different crypto transactions under various tax categories. Airdrop, which is a form of receiving crypto as a reward, is also a taxable event .. In this article we will educate you on what basis airdrops are being taxed in the UK.

What Is An Airdrop?

Surprise!! “You have a credit of 5 Bitcoins in your wallet!!” 

Have you ever received such a notification on your phone? If yes, then this is an airdrop.

In an airdrop, you will receive some tokens or a crypto asset that are allocated to you as a reward for an activity done in the past, as a part of the promotion of crypto, or for no reason. But what actually is an airdrop?

An airdrop is an unsolicited distribution of a cryptocurrency token or coin, usually for free, to numerous wallet addresses. This could be done to reward the community, promote a startup, or encourage some excitement among the users of a particular token. It is a way to attract attention and new followers.

The HMRC considers airdrops as income. So if you have received any airdrop in the previous, you may have to report it to HMRC, and if that qualifies as an income, pay tax on it.

Tax On Crypto Airdrop In UK

Airdrops are an addition of some kind of token/coins to your existing crypto wallet. The purpose of airdrop determines the taxable event in such cases.

For example:

  1. You are rewarded with some token to take part in a marketing or an advertisement campaign where you are given tasks to complete, and you have completed the tasks.
  2. You have received a few tokens of crypto because you already hold a specific cryptocurrency.
  3. You registered yourself to receive an airdrop on a particular platform.

In all of the above cases, you have received an airdrop for undertaking an activity in the past. According to the HMRC, if you receive an airdrop in return or in expectation of performing a service or doing something in return to qualify for the airdrop, it will be considered as an income.

In such cases, the value of the airdropped crypto will be treated either as miscellaneous income or trading income, depending on the circumstances. The Sterling market value of the crypto on the date of receipt will be taken as the taxable income liable to income tax.

On the contrary, HMRC says if the airdropped tokens are received without an expectation of, or doing anything in return and are not received as part of a trade or business involving crypto assets or mining, there is no income to declare and no income tax to pay. 

Now that you have received the airdropped tokens, you may want to sell, swap, exchange or gift them. Any such activity which involves the disposal of the airdropped token will attract capital gain tax.

Your cost basis for airdrops is the fair market value on the day you received them in Sterling. The sale value will be the market value on the date of disposal. The difference will either be a gain—attracting tax—or a loss, which must be reported so that it can be noted as a loss when calculating your taxes.

How To Calculate Tax On Crypto Airdrop In UK

 When you receive an airdrop: Taxed as income tax 

Taxable value is the market value on the date of receipt of the tokens

When these tokens are disposed of: Taxed as capital gain tax 

Taxable value = Sale – Cost basis on the date of purchase 

Note: If the airdrop is received without providing some kind of service or action in return, there is no tax implication

Real-Life Scenarios

Airdrops with Zero Market Value

Andrew received an airdrop of 2,000 Arbitrum (ARB) tokens. The value at the time of receipt is £0.

There won’t be any tax payable, as the money value of the Airdrop is 0.

Airdrops with a Fair Market Value

Andrew received an airdrop of 2,000 Arbitrum (ARB) tokens. The value at the time of receipt is £5,000.

He sold 2,000 ARB tokens after 2 months for £6,000. This makes him liable to pay income and capital gains tax.

Wondering why?

Well, the initial airdrop of 2000 ARB, whose value is £5,000, will be subject to income tax.

Moreover, the gain of £4000 on the sale of these tokens will be subject to capital gain tax.

Conclusion

The tax treatment of airdrops in the UK can be complex. However, there are a few fundamental principles to remember. First, airdrops that are received in return for providing a service or other consideration will be taxed as income. Second, airdrops that are received without providing any consideration will be taxed as capital gains. 

Still confused about how to calculate and pay your crypto taxes in the UK. Don’t worry, KoinX is here to your rescue. Let KoinX be your partner in simplifying crypto tax matters. Download your comprehensive crypto tax report today and gain clarity on your tax responsibilities.