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Airdrops are becoming increasingly popular but they can be a pain for UK taxpayers! Airdrops may be subject to Income Tax and Capital Gains Tax so we’ve joined up with crypto tax calculator Recap to find out more.
We’re solely covering airdrops in this article but head to our UK Crypto Tax Guide for a broader understanding.
How are Crypto Airdrops Taxed?
When you receive an airdrop you might need to pay income tax and when you later dispose of the airdrop you will be subject to capital gains.
Do I Need to Pay Income Tax on Airdrops?
HMRC have confirmed that you may need to pay income tax when you receive an airdrop but it depends on why you received it.
Income tax will apply if an airdrop is received for or in expectation of a service or doing something in return to qualify, for example providing some coding work or shilling the token.
The sterling market value of the asset at date of receipt should be recorded on the Tax Return as Miscellaneous Income and paid as Income Tax. If the airdrop is received as part of a trade or business involving cryptoassets or mining then it should be recorded as Trading Income and Income Tax and National Insurance will apply.
If the airdropped tokens are received without an expectation of, or doing anything in return, and are not received as part of a trade or business involving cryptoassets or mining; there is no income to declare and no income tax to pay. That solves any worries about all those random airdrops received!
How Much Income Tax Will I Pay?
The amount of tax you’ll pay depends on your total annual income - here are the UK income tax rates for the 2023/24 tax year
* The Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000.
Capital Gains Tax on Airdrops
When you eventually dispose of airdropped crypto you will be subject to Capital Gains Tax regardless of whether it was taxable income or not, based on its change in value since acquisition.
For taxable airdrops this is fairly simple to calculate as the sterling market value of the asset at date of receipt (as reported) is treated as your acquisition cost.
The acquisition cost for non-taxable airdrops remains uncertain, it could be argued that the acquisition cost is Nil or the sterling market value at date of receipt. You should consider when you received the airdrop and when the smart contract was executed, it’s best to reach out to a tax professional when you are not sure.
How Much Capital Gains Tax Will I Pay?
You need to pay capital gains tax when your total capital gains exceeds the annual capital gains allowance (£3,000 for the UK 2024/25 tax year). Then you’ll pay tax of 10% or 20% depending on your total income in the tax year.
How to Calculate Your Crypto Taxes
Calculating crypto taxes can be complicated and time consuming for investors with lots of transactions. That’s where our crypto tax calculator partner Recap can help. Simply connect your accounts and wallets and they find valuations and apply tax calculations to all of your transactions, leaving you with a report ready to share with your Crunch accountant.
The information provided in this article is for general informational purposes only and should not be construed as financial or tax advice. We recommend consulting with a qualified tax advisor or financial professional who can provide personalised advice tailored to your specific circumstances.
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