Crypto assets by airdrop

The ATO has issued a draft ruling that looks at the income tax consequences for an Australian resident taxpayer of issuing or receiving crypto assets as the result of an airdrop.

An airdrop generally occurs when crypto assets are distributed to a holder’s wallet at no direct cost.

The draft ruling considers three key scenarios for both the issuer and the recipient of the asset.

1. Airdrops received in the course of a crypto trading business
Where the recipient is carrying on a business of trading crypto assets, the market value of the airdropped asset is assessable as ordinary income under section 6-5. This applies even where the airdrop may otherwise appear to be a gift or windfall.

Where the issuer is also carrying on a business of crypto asset trading and holds the relevant assets for sale or exchange in the ordinary course of that business, the assets will generally be treated as trading stock under Division 70.

2. Airdrops received in exchange for goods or services
Where an airdropped asset is provided in return for goods or services supplied by the recipient, the money value of the asset is assessable income under section 6-5, regardless of whether the recipient is carrying on a business.

For the issuer, the costs of acquiring or creating crypto assets distributed in exchange for goods or services may be deductible under section 8-1, subject to the usual requirements.

3. Airdrops received by retail investors
Where an individual is not carrying on a business of crypto trading, and the airdrop is not provided in return for services or otherwise connected with an income-producing activity, the market value of the asset will generally not be ordinary income when received. Instead, CGT event A1 will generally occur when the taxpayer later disposes of the asset.

For the issuer, CGT event A1 occurs when the asset is distributed. Where there are no capital proceeds, as is generally the case with an airdrop, the issuer is taken to have received the market value of the asset at the time of the event.

The draft ruling also considers situations where an individual receives an airdrop without their knowledge or consent. Even where the recipient does not carry on a crypto trading business, a capital gain may arise when the asset is subsequently disposed of. Where costs are incurred to remove or rectify unwanted assets in a wallet, those costs may form part of the asset's cost base in determining the resulting capital gain or loss.

The ruling also provides guidance on valuing airdropped assets, distinguishing a crypto trading business from a hobby, and applying the rules to practical examples.

For more information see here.