Airdrop Crypto Taxes in the UK

Crypto enthusiasts love airdrops. They often give the impression of free money and enable web3 users to quickly capitalize on being an early adopter of a particular project. However, are they really “free”? UK’s tax authorities have a rigorous view on this matter.

Below you can find all the necessary information about airdrops and taxes you need to pay in the UK after receiving and selling your tokens. 

 

What is an airdrop? 

The competition between crypto projects is enormous. No matter if we are currently in a bear or a bull market, new ideas and protocols are emerging day by day, trying to attract web3 enthusiasts and investors. Therefore, to catch the audience’s attention and achieve satisfactory adoption, they need to encourage people to follow them and use their solutions.

So-called crypto airdrops are one of the most popular marketing tactics that help web3 projects accomplish these goals. Airdrops rely on sending “free tokens” to users who meet particular requirements as, for example: 

• They interacted with a product (e.g., a web3 wallet),
• They followed the company on social media, 
• They sent information about the project to their friends and “spread the word” about it.

Thanks to airdrops, crypto projects achieve immediate adoption among users and, very often, significant social media exposure – due to the intensified discussions about projects that use such tactics. What is more, the aforementioned requirements are very often targeted at expanding the project’s reach. 

At the same time, users receive free tokens that they can sell very quickly at a much higher price or hold on their wallets and treat them as long-term investments. Then, it’s like a win-win situation.

How does airdrop work?

There are many types of crypto airdrops. Most often, users are able to claim “free tokens” after meeting specific criteria like the ones mentioned above. However, airdrops can also serve as “bounties” for people who, for example, spotted a bug in the protocol’s code. They can be treated as a reward for users who hold a particular token for a long time as well.

However, when it comes to the mechanics of airdrops, they usually rely on a simple transaction – tokens are sent from the company’s or founders’ wallets to the eligible users. 

Are airdrops free tokens?

As airdropped tokens are sent to the web3 wallets of individual users, you may wonder whether they fall into the same UK tax category as other crypto transactions. 

Well, as they very often serve as rewards or digital assets that users can easily capitalize on, the only answer could be yes – airdrops need to be taxed. 

 

Airdrop taxes in the UK

HM Revenue & Customs (HMRC), the primary tax institution in the UK, is very much aware of crypto investments and various incentive mechanisms used by web3 projects. 

Therefore, airdrops were thoroughly analyzed by HMRC authorities, who devoted them a separate chapter in their Cryptoassets Manual (CRYPTO21250). It clearly states that airdropped tokens could be subject to both Income and Capital Gain Tax in the UK. However, only in specific circumstances.

 

Airdrop Income Tax in the UK

Applying an Income Tax to airdropped tokens depends very much on whether you undertook an action in order to receive them. Suppose you had to meet specific criteria to obtain the airdrop and, for example, posted information about a project on your social media. In this case, it can be perceived as an activity focused solely on receiving “an income” thanks to this action. In this case, the crypto Income Tax should be applied. 

You will also have to pay an Income Tax after receiving an airdrop in the form of a bonus from your employer. Even though it won’t appear on your bank account (it’ll be transferred to your web3 wallet instead), you will still need to treat it as a regular income and settle accounts with HMRC.

However, there are circumstances where airdrop Income Tax in the UK will not apply. If you receive tokens in a personal capacity without doing anything in return (for example, when you’re a long-time user of a particular web3 project), you won’t be charged with a tax. These cryptocurrencies will be treated as your personal assets that you don’t consider a source of potential gains. Even though you probably will. 

 

Airdrop Capital Gain Tax in the UK

When it comes to the UK Capital Gain Tax, the rules are much more precise and strict. If you decide to sell the airdropped tokens and earn a profit on your transaction, you’ll have to “share your earnings” with HMRC. And, since you didn’t have to pay for the airdropped tokens and you’ll likely sell them at a higher price than the one at the time of the airdrop, you can take the Capital Gain Tax for granted. 

Then, the question is not “if” but “when” you’ll need to pay an airdrop Capital Gain Tax in the UK. There are a few situations that’ll make you eligible for this tax:

• When you sell the airdropped tokens for money,
• When you exchange the airdropped tokens for a different type of token,
• When you use the airdropped tokens to pay for goods or services,
• When you give away the airdropped tokens to another person (unless it’s a gift to their spouse or civil partner).

However, there are several costs that you can deduct to lower your income and pay less tax. You can decrease your liabilities by deducting the following:

• Transaction fees paid before the transaction is added to a blockchain. For example, you’ll have to pay fees in order to claim the airdrop and add tokens to your wallet.
• Advertising for a buyer or seller – only if it results in additional costs on your side. However, please remember that it’ll make you subject to Income Tax.

Moreover, the Capital Gain Tax amount will be lower if you have already paid an Income Tax. Let’s take a look at this example:

• After completing several activities (like sharing social media posts of a web3 project), you became eligible for an airdrop of their newly minted tokens.
• You receive 1,000 XYZ tokens worth £3 at the time of the airdrop.
• Because you carried out specific activities to obtain the crypto airdrop, you need to pay the Income Tax. Then, you report £3,000 (3 x £1,000) as your income. 
• After two months, you discover that your XYZ tokens are now worth £15. You’re excited about your profits and decide to sell immediately. 
• You simply go to Binance, send your tokens to the Binance wallet and sell them right after they appear on the exchange. You get £15,000 as a return.
• After the transaction, you decide to calculate your Capital Gain Tax. As you’ve already reported the airdrop income of £3,000, you’ll have to pay tax on £12,000 (£15,000 – £3,000). Tough luck, but you still made a great profit!

If you want to know more about calculating Capital Gains, please check out our Crypto Tax Guide in the UK blog post.

 

How to avoid airdrop crypto tax in the UK?

Trying to avoid a crypto tax – no matter if it applies to airdrops or usual cryptocurrency transactions – is never a good option. HM Revenue & Customs (HMRC) can obtain customer data from exchanges and track your activities very easily. Therefore, UK authorities will likely discover your activities if you decide to sell your airdropped tokens. 

 

How to calculate airdrop taxes in the UK?

Instead of trying to avoid airdrop taxes in the UK, it’s better to find a solution that’ll enable you to calculate them in a safe and convenient manner. 

Thanks to Cryptiony, you can quickly figure out the amount of both Income and Capital Gain Taxes. All you need to do is to input the airdrop-related data (such as the number of tokens and their price) into our app. The software will calculate your tax liabilities automatically, relieving you of stress and uncertainty that is usually inseparable from tax activities. Moreover, if you move your airdropped tokens to one of the major exchanges (such as Binance, Coinbase, or Crypto.com), the system will automatically collect all the necessary data. Your job will be limited to just a few clicks.

You can treat Cryptiony as your personal crypto tax calculator for the UK and test it for free. Simply sign up for a free and check how easy and safe it is to calculate airdrop taxes in the UK using automated software.