By Damian Lloyd, Senior Associate.
The realm of cryptocurrency continues to evolve, introducing innovative ways to distribute new tokens to users. Among these methods, airdrops have gained popularity as a means of promoting new projects or rewarding loyal users. However, as with many aspects of the crypto world, the tax implications of receiving airdrops remain a complex issue. This article, inspired by insights from Damian Lloyd, Senior Associate, delves into the Australian Taxation Office’s (ATO) stance on airdrops and offers guidance on navigating the taxation landscape.
Understanding Airdrops
Airdrops are distributions of crypto tokens, often free of charge, to a wide array of recipients. These can range from holders of a particular token on a specific blockchain network to participants of a new project in exchange for tokens. The method aims at raising awareness or rewarding participation but also raises questions on the tax obligations for the recipients.
The ATO’s Stance on Airdrops
Recently, the ATO updated its guidance on the tax treatment of airdrops, distinguishing between tokens that have an existing market and those that do not at the time of receipt. The differentiation is crucial as it directly influences whether the tokens are considered part of ordinary income or not, subsequently affecting the taxpayer’s obligations.
- For Previously Traded Tokens: If the airdropped token has been previously traded, its market value at the time of receipt is considered ordinary income. This value also serves as the cost base for calculating potential capital gains upon disposal of the token.
- For Tokens Without Previous Trading: In cases where there is no prior trading of the token, the ATO does not consider the receipt of such tokens as deriving ordinary income or making a capital gain. The cost base for these tokens could be zero or the market value of any amount paid to acquire them.
Tax Implications and Uncertainties
The ATO’s current guidance on the taxation of airdropped tokens lacks clarity regarding its legal foundation, presenting challenges for tax professionals in determining the appropriate tax treatment. This ambiguity becomes particularly pronounced in instances where airdropped tokens possess inherent market value but lack a prior history of trade. For instance, a cryptocurrency project may initially issue a series of Non-Fungible Tokens (NFTs) for direct sale to consumers. Subsequently, the project might release a new, distinct series of NFTs for promotional purposes, distributing them to holders of the original series.
In such scenarios, despite the absence of prior trade, the newly issued NFTs hold a market value. According to one interpretation, these tokens represent an initial allocation airdrop, and their market value is not immediately taxable as ordinary income since it has not been verified through sales.
Conversely, it could be argued that the presence of market value, irrespective of previous sales, might necessitate inclusion in the recipient’s ordinary income. Given the potential for divergent interpretations in these circumstances, it is imperative to seek additional professional advice to ensure compliance and to substantiate one’s tax position effectively.
Example
Consider a user receiving an airdropped token ($HARRY) from a project that has yet to be traded publicly but has an established market value due to direct sales from the project team to investors. The tokens are airdropped, and the value drops from $1 per token to 1c in the first day of live trading.
The tax treatment of such a token remains ambiguous under current ATO guidance. On one hand, the $HARRY token has not been publically traded, but on the other hand the $HARRY token has a value from from the latest investment information.
If $HARRY tokens were taxed, and recipients didn’t sell them immediately, they may pay tax on $1 per token, but only have a portfolio value of 1c. On sale, the recipient would have a capital loss of 99c per token, and they can’t use the that loss to offset the income tax on $1 per token.
Alternative Views
Some tax professionals argue that the ATO’s approach to categorising airdropped tokens might be overly simplistic, failing to account for the nuances of how and why tokens are received. It also fails to properly explain how the CGT market value substitution rule applies to deem a higher cost base in certain scenarios.
A more detailed analysis is essential to accurately determine how a specific airdrop is taxed in Australia.
Conclusion
The taxation of airdropped tokens in Australia presents a complex scenario with differing treatments based on the trading history of the token. As the ATO’s views continue to evolve, it’s imperative for recipients of airdropped tokens to stay informed and consult with tax professionals to ensure compliance and make informed decisions about their crypto assets.
Disclaimer: This material is produced by Cadena Legal, a NSW-registered legal practice. It is intended to provide general information and opinions on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Contact us here for advice.
