What are the tax implications for Airdrops?

What are the tax implications for Airdrops?

Airdrops Received Without Doing Anything in Return: If you receive airdropped tokens without providing any service or doing anything in return, and they are not part of a trade or business involving cryptoassets, these tokens are not subject to Income Tax when received. However, when you dispose of these tokens, you will need to pay Capital Gains Tax (CGT) on the full disposal value

Airdrops Received in Return for Services or as Part of a Trade: If you receive airdropped tokens in return for providing a service or as part of a trade or business, these tokens are considered taxable income at the time of receipt. The value of the tokens at the time of receipt sets the base value. When you dispose of these tokens, you will pay Capital Gains Tax on the difference between the disposal price and the base value.

This raises the question of how we classify “Services” or “Part of a Trade” in these circumstances. Specifically airdrops received as a result of staking or simply for just holding tokens:

Staking: When you stake tokens, you lock them up to support the operations of a blockchain network, often earning rewards in return. According to HMRC, whether staking is considered a taxable trade depends on factors such as the degree of activity, organization, risk, and commerciality.

If it is not considered a trade, the rewards you receive from staking are treated as miscellaneous income and are taxable at the time of receipt. You may also need to pay Capital Gains Tax (CGT) when you later dispose of the staked tokens.

Holding Tokens: Simply holding tokens is not considered a service or trade. There are no tax implications until you dispose of the tokens. When you sell or exchange the tokens, you will need to calculate and pay CGT on any gains made.

So, staking can potentially be seen as a service or trade depending on the specifics, while holding tokens is not.
 

We are the UK's leading Crypto Tax specialists.

We know crypto tax and can be your comprehensive and expert crypto tax guide at all levels of complexity – from cryptocurrencies and NFTs, to trading and DeFi. 

You can find out more about our Crypto Tax services here. 

Or give our expert Crypto Tax team a call on 01380 723692 or send them an email for an informal chat.  

We have several blog articles that might be of interest:

Disclosing historic cryptoasset tax liabilities

Navigating Cryptocurrency in Estate Planning

Banking & Crypto