A Taxmans guide to taxation of crypto assets: Airdrops

Table of Links

Abstract and 1. Introduction

2. Bitcoin and the Blockchain

   2.1 The Origins

   2.2 Bitcoin in a nutshell

   2.3 Basic Concepts

3. Crypto Exchanges

4. Source of Value of crypto assets and Bootstrapping

5. Initial Coin Offerings

6. Airdrops

7. Ethereum

   7.1 Proof-of-Stake based consensus in Ethereum

   7.2 Smart Contracts

   7.3 Tokens

   7.4 Non-Fungible Tokens

8. Decentralized Finance and 8.1 MakerDAO

   8.2 Uniswap

   8.3 Taxable events in DeFi ecosystem

   8.4 Maximal Extractable Value (MEV) on Ethereum

9. Decentralized Autonomous Organizations - DAOs

   9.1 Legal Entity Status of DAOs

   9.2 Taxation issues of DAOs

10. International Cooperation and Exchange of Information

    10.1 FATF Standards on VAs and VASPs

    10.2 Crypto-Asset Reporting Framework

    10.3 Need for Global Public Digital Infrastructure

    10.4 The Challenge of Anonymity Enhancing Crypto Assets

11. Conclusion and References

6. Airdrops

Another method used by developers of new tokens or blockchains is to give out crypto tokens for free to incentivise its usage and enhance market presence and exposure. These free tokens are known as airdrops. They are also a kind of reward for the early adopters of the new crypto asset. For example, Uniswap, a decentralized exchange gave 400 Uniswap token to all the Ethereum accounts that had interacted with its smart contract prior to September 1, 2020. This was aimed at rewarding users for using the Uniswap exchange and make them stakeholders in the success of Uniswap.

To receive airdrops users are required to perform actions like using the platform or service, signing up for newsletters and mailing lists, hold tokens for a specified period, contribute to the development of the project etc. Non-Fungible Tokens or NFTs can also be airdropped for using an NFT platform or buying/selling NFTs.

Airdrops are also important taxable events and in most jurisdictions an income tax is chargeable upon the receipt of an airdrop. The receipt of an airdrop is not taxed but is considered acquisition of a crypto asset with zero basis in some jurisdictions. Also, the subsequent sale, swap, spend or gift transactions are also subject to capital gains. In some jurisdictions, depending upon the domestic tax laws and guidance, gifts might not be taxed.