Part 6 - The chain of crypto taxes

Airdrops occur when you receive something free in your wallet. This happens all the time in crypto, and for a variety of reasons, such as a protocol switching to a new version due to bugs in smart contracts of the original version, or as part of a marketing or advertising campaign for a new token.

Personal investors who receive an airdrop in return for performing a service or for satisfying a condition, will need to report the value of the airdropped tokens as miscellaneous income and pay Income Tax. When disposed of, the base cost for CGT will be the value of the airdropped tokens on the day of receipt.

If you receive an airdrop for doing nothing, you will not be subject to income tax, but CGT treatment may still apply when you come to dispose of the crypto. However, there will be a zero base-cost, meaning a good proportion of your airdropped tokens is ultimately taxed.

In the situation that you are deemed as trading in business, or you are a mining business, any airdrops received will be subject to Income Tax and National Insurance, whether you did something to get it or not.

Crypto dust can also be considered an airdrop, but beware. Dust gets its’ name from the fragmented pieces of crypto that can appear in your wallet. Sometimes it’s so small you won’t even know it’s there. The dust itself isn’t an issue, it’s what you do with it. If it has been deposited by a malicious actor, it’s possible that you could accidentally transfer it with your main funds, increasing your risk of attack. The crypto bad guys will trace your transactions on the blockchain in an attempt to get an understanding of who you are. This is followed up with phishing and targeted hacks off the blockchain. The good news is the rise of DefI has made it impossible to reach owners from their blockchain wallets, but with that said, many people will hold wallets on CEXs, such as Binance.

If you see dust, don’t panic, it could be legitimate, as it’s now used as a marketing method instead of emails.