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 Australia, 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. Here’s how different transactions related to Airdrops are taxed in Australia.
Receiving An Airdrop
In Australia, receiving an airdrop is typically considered taxable income. According to the Australian Taxation Office (ATO), the value of the airdropped tokens on the day you receive them is treated as ordinary income. To calculate how much tax you owe, determine the fair market value of the tokens on the date of receipt and apply your relevant income tax rate.
Exceptions for Initial Allocation Airdrops
The ATO does offer an exception for initial allocation airdrops. These airdrops are not taxed as ordinary income upon receipt. Instead, they are tax-free, with the cost basis being what you paid for the tokens—often zero if you received them for free. Examples of such airdrops include ApeCoin (APE) and Ethereum Name Service (ENS).
Grey Areas in Airdrop Taxation
Some airdrops are claimable before they become tradable on exchanges, creating confusion around their taxable value. Since these tokens lack a market value when claimed, it’s unclear whether investors should declare zero value at receipt or wait until the tokens are tradable. In such cases, you may require expert guidance due to the evolving nature of the crypto landscape.
Selling or Trading Your Airdropped Tokens
Selling, trading, or even giving away airdropped coins triggers a capital gains event in Australia. You must report the transaction to the ATO and calculate any capital gains or losses.
The cost base for calculating the gain depends on the value of the coins at the time they were airdropped. If the airdrop is free, your cost base is zero. Any profit you make when selling these coins will be subject to capital gains tax.
Make sure you track the date and value of the airdrop, which will be crucial for calculating your tax liability. If the value of the coins increases from the time you received them, you will owe tax on the difference between the selling price and the original value. Therefore, proper record-keeping is key to avoiding issues with your tax filings.
Receiving Crypto From A Hard Fork
A hard fork occurs when a cryptocurrency splits into two separate chains, creating new coins. In Australia, the tax treatment for receiving crypto from a hard fork depends on whether you’re an investor or running a crypto business.
For investors, the ATO does not impose Income Tax on new coins received from a hard fork. The cost basis of these new coins is zero, which means when you eventually sell or trade them, the entire value will be considered a capital gain. This affects how much capital gains tax you will pay.
On the other hand, if you operate a cryptocurrency business, the ATO applies trading stock rules. Any new coins received from a hard fork are treated as trading stock, meaning their value will be added to your assessable income. You must track the value of these coins and declare them at the end of the financial year, just like other assets in your business.
Selling Crypto Received From A Hard Fork
When selling cryptocurrency received from a hard fork, Australian tax rules treat the entire value of the coins as profit. This is because, according to the Australian Taxation Office (ATO), the cost basis for these new coins is zero. Therefore, you are liable to pay capital gains tax on the full amount when you sell, spend, swap, or gift the crypto assets.
However, you can reduce this tax burden by holding onto the coins for more than a year. Australian investors benefit from a 50% long-term CGT discount if they hold assets for at least 12 months before selling. This discount applies to forked coins, just like any other crypto asset, reducing your taxable amount by half.
By strategically timing your sale, you can minimise the tax impact on your earnings, making it an effective way to manage tax obligations from hard-forked crypto.
Token Address Change
A token address change occurs when a cryptocurrency shifts its underlying technology or updates its contract address. This can happen for several reasons, such as migrating to a new blockchain or upgrading the token’s functionality. A well-known example includes EOS moving from the Ethereum blockchain to its own EOS mainnet. Similarly, DAI once updated its contract address, renaming the old token SAI.
In most cases, token address changes do not trigger any tax liabilities. You can mark these events as ‘swaps’ when using tax calculation platforms like KoinX. This ensures accurate tracking of your transactions without worrying about immediate tax implications.
However, it’s important to consider the ATO guidelines. If the old tokens retain value after the new ones are issued, the ATO may view this event as a fork, not a swap. In this case, you may be liable for capital gains tax on the old tokens. Consequently, it becomes essential to always review the value of both sets of tokens to remain compliant.
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.
Conclusion
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.
To ease this process and make crypto tax compliance more accessible, consider using KoinX. A crypto tax software that gives accurate tax reports! Join KoinX today to simplify your crypto tax journey.
Frequently Asked Questions
Can You Save Taxes On Crypto Airdrops?
Yes, you can save taxes on crypto airdrops by holding them for over a year. You can offset your capital losses with capital gains. Using deductions or capital losses may help reduce your tax liability, but it’s always wise to consult a tax professional to explore legal ways to optimise your tax situation.
Are Crypto Airdrops Reliable?
Crypto airdrops can be legitimate, but they are not always reliable. Some projects offer airdrops to promote their new tokens, and these can hold real value if the project gains traction. However, there are also scam airdrops that aim to steal personal data or compromise wallets. It’s important to research the project behind the airdrop and ensure you’re not exposing yourself to unnecessary risks.
Are Referral Bonuses Also Taxable In Australia?
Yes, referral bonuses in Australia are taxable. If you receive crypto as a referral bonus, the ATO treats it as a form of income, meaning you’ll need to report it when filing your tax return. The value of the bonus at the time you receive it will be added to your assessable income. Like any other income, it may be subject to tax depending on your income bracket.
Can ATO Track My Airdrop Transactions?
Yes, the ATO can track crypto airdrop transactions. Through data-matching programs, the ATO collaborates with crypto exchanges and service providers to monitor transactions, including airdrops. If you receive an airdrop and fail to report it, the ATO may still find out, leading to potential penalties. It’s essential to declare all your crypto income to stay compliant with tax regulations.
