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Received an airdrop of crypto this year? You might just be in for a surprise tax bill because crypto airdrops may be subject to both Income Tax and Capital Gains Tax. To break down the rules, we’ve teamed up with crypto tax calculator Koinly.
Note: We're only covering airdrops tax in this article, so if you need to learn about the basics, we've got you covered in our Crunch UK Crypto Tax article.
How are crypto airdrops taxed?
HMRC has plenty of guidance on airdrops and how they’re taxed - but it’s not always all too clear cut, because how your airdrops are taxed depends on the reason you received the airdrop.
As well as this, the tax you’ll pay depends on the transaction you’ve made - as your airdrop may be subject to Income Tax or Capital Gains Tax. We’ll cover both.
Income Tax on crypto airdrops
When you receive an airdrop, you might need to pay Income Tax on it. We say might because this all depends on why you received an airdrop.
HMRC guidance is clear that Income Tax only applies to airdrops that you received in return for a service (or in expectation of a return), while airdrops you received without doing anything in return are not subject to Income Tax upon receipt.
In return for a service is broad language, and could cover a lot of different scenarios - for example, sharing a social media post, or signing up to use a particular platform. As a result, it’s likely most airdrops will be subject to Income Tax upon receipt with a few exclusions - for example, receiving an airdrop as a result of a hard fork.
When you receive airdrops of crypto that are subject to Income Tax, you’ll pay tax based on the fair market value in GBP at the time you received them.
The amount of tax you’ll pay depends on the tax band you’re in based on your total annual income. Here’s the Income Tax bands you may fall into for the 2023-24 tax year:
*Please note those earning over £125,140 a year do not receive a tax-free personal allowance
**Different income tax rates and thresholds apply to Scotland
However, if you later go on to dispose of your airdropped coins, you’ll pay Capital Gains Tax as well.
Capital Gains Tax on crypto airdrops
If you dispose of any crypto - including airdropped crypto - HMRC is clear that this is a disposal of a capital asset from a tax perspective, and any gain is subject to Capital Gains Tax.
Disposals of crypto include selling crypto for GBP, swapping crypto for crypto, spending crypto, and gifting crypto (excluding to your spouse)
So if the value of your airdropped coins has increased between the time you received them and the time you dispose of them, you’ll have a capital gain and may need to pay Capital Gains Tax if you’re over the annual exempt amount (a tax free allowance every UK taxpayer receives).
In the 2022-2023 tax year, the annual exempt amount was £12,300, but this was cut for the 2023-2024 tax year to £6,000 and will halve again the next financial year to £3,000. So if you have capital gains over that amount from crypto and other capital assets, you’ll pay Capital Gains Tax on it.
How much Capital Gains Tax you’ll pay depends on your total annual income. Here are the Capital Gains Tax bands:
How to calculate your crypto taxes
Calculating your taxes due on airdrops can be time-consuming. For starters, if your airdrop is subject to Income Tax, you’ll need to identify the fair market value of your airdropped coins or tokens in GBP at the time you received them.
As well as this, if you’ve disposed of any airdropped coins, you’ll need to calculate any capital gain or loss as a result, using the share pooling cost basis method.
Fortunately, our crypto tax partner, Koinly, can do all this for you and save you hours, as well as generate your HMRC crypto tax report, ready to hand over to your Crunch accountant.
Get an exclusive 30% discount on your Koinly crypto tax report when you sign up to Koinly using code CRUNCH30.
Disclosure
The information on this website is for general information only. It should not be taken as constituting professional advice from Koinly. Koinly is not a financial adviser or registered tax agent. You should consider seeking independent legal, financial, and taxation or other advice to check how the website information relates to your unique circumstances. Koinly is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.
