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.
How Are Crypto Airdrops Taxed In The UK?
HMRC has specific guidelines regarding the taxation of airdrops and forks in the UK. While forks are tax-free, airdrops come with more tax obligations. You won’t incur any tax on soft or hard forks, but airdrops are liable for both Income Tax and Capital Gains Tax. Here’s how it works.
Tax Treatment of Soft and Hard Forks
When it comes to soft and hard forks, investors can breathe a sigh of relief. HMRC does not impose taxes on these forks.
Soft Forks:
With soft forks, you do not receive any new assets. Consequently, there is no tax liability since no tangible change in ownership occurs.
Hard Forks:
In the case of hard forks, you may receive new coins. Fortunately, HMRC does not require you to pay Income Tax upon receiving these coins. However, it’s essential to understand that your cost basis for the coins you acquire during a hard fork is based on your existing tokens from the previous blockchain.
This approach is important when you later decide to sell, swap, or gift these coins, as any gains from such transactions will still be subject to Capital Gains Tax.
Tax Treatment of Soft and Hard Forks
In contrast to forks, airdrops attract a different tax treatment. Generally, HMRC views airdrops as income, and you will likely need to pay Income Tax on them.
HMRC classifies airdrops as taxable income when you perform specific actions to earn them. For example, if you share a social media post or receive tokens as a reward for trading activities, HMRC considers this as income. However, if you receive an airdrop without any action on your part, it may not be taxable as income.
To determine how much Income Tax you owe, assess the fair market value of the airdropped tokens in GBP on the day you received them. This amount becomes your taxable income.
Selling or Swapping Airdrop Coins
The tax implications don’t stop with receiving an airdrop. When you decide to sell, swap, spend, or gift the coins or tokens acquired through an airdrop, you will also face Capital Gains Tax.
The cost basis for any tokens you received in an airdrop is the fair market value on the day you received them in GBP. Thus, any profit you make from these transactions will be subject to CGT, similar to other crypto transactions.
How To Calculate Tax On Crypto Airdrop In UK
Airdrops can provide new tokens, but they also come with tax obligations. Here’s a straightforward guide to help you navigate this process.
Receiving the Airdrop
When you receive an airdrop, HM Revenue and Customs (HMRC) treats it as taxable income. You need to calculate the taxable value using the formula:
Taxable Value = Market Value on the Date of Receipt of the Tokens
For instance, if you receive 100 tokens valued at £1 each on the day of receipt, you will report £100 as income on your tax return.
Disposal of Airdrop Tokens
After receiving your airdrop, if you decide to sell or dispose of the tokens, they may incur Capital Gains Tax (CGT). To calculate this tax, use the following formula:
Taxable Value = Sale Price – Cost Basis on the Date of Purchase
The cost basis for airdropped tokens is generally the market value at the time you receive them. If you sell the tokens for £200 and the cost basis is £100, you would calculate your capital gain as follows:
Taxable Value = £200 (Sale Price) – £100 (Cost Basis) = £100 (Capital Gain)
No Tax Implications for No Return
If you receive an airdrop without providing anything in return, such as services or payments, there are no tax implications. In this case, you do not need to report anything, allowing you to benefit from the tokens without worrying about immediate tax liabilities.
By using these formulas and staying informed about your obligations, you can enjoy the benefits of airdrops while complying with UK tax regulations.
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.
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Frequently Asked Questions
What Will The Acquisition Cost Of Soft Forks?
The acquisition cost of soft forks is considered zero. This is because soft forks don’t result in the creation of new coins; they are backwards-compatible updates to the blockchain protocol. Since no new assets are gained, there is no acquisition cost associated with them for tax purposes.
Can HMRC Track My Crypto Airdrops?
Yes, HMRC can track your crypto airdrops. With improved regulations and data-sharing agreements with crypto exchanges, HMRC can access information on transactions, including airdrops. It’s important to declare any airdrops you receive, as they may be subject to tax depending on their value and how they are used.
Shall I Pay Tax On Earning Airdrops From Promotion?
Tax on airdrops from promotions depends on the fair market value (FMV) of the token at the time you receive it. If the airdrop has a readily ascertainable value, it may be treated as income and taxed accordingly. Future capital gains tax may apply if the token increases in value and is later sold.
What Is The Difference Between Soft and Hard Forks?
Soft forks are backwards-compatible updates to a blockchain, meaning old nodes can still interact with the updated version. Hard forks, however, create a permanent split, resulting in a new chain and often new coins. While soft forks maintain compatibility, hard forks result in two separate blockchains and potentially new crypto assets.
