Crypto investors benefit from new tax guidance on ‘airdrops’

Thousands of crypto investors are eligible for refunds or reductions in their tax bill following new guidance from the ATO on the tax treatment of “airdrops” – the often unsolicited distribution of crypto tokens or coins, usually for free, to wallet addresses.

The new advice means crypto investors could substantially lower their overall tax obligation, as many are believed to have received airdrops of initial allocations – those with no trading history – at no cost to them.

ATO’s clarification of the tax treatment of crypto will see many investors eligible for a refund or a reduction in their tax bill. Credit:iStock

Airdrops of new tokens for free are made to digital wallets as a way of gaining attention and attracting new followers to the cryptocurrency project that distributes the tokens.

Airdrops of established cryptos – those that have a trading history – are also made to digital wallets, often as a reward to those who already hold the crypto.

The ATO has not changed its view that airdrops of an established cryptocurrency are similar to a distribution from an investment and should be treated as ordinary income in tax returns at the monetary value of the crypto at the time it is received.

However, for an airdrop that is the very first distribution of the crypto tokens or coins the ATO’s guidance says: “You do not derive ordinary income or make a capital gain at the time you receive them.”

Tommy Honan, head of strategic partnerships at Swytfx, a large Australian crypto exchange, says it is not possible to come up with an exact number of how many crypto investors will benefit from the guidance.

His best estimate is that a quarter of cryptocurrency owners would have been eligible for airdrops of initial allocations over the past 12 months.

Harrison Dell, a tax lawyer and director of Cadena Legal, says some notable recent airdrops likely to be treated by the ATO as initial allocations include Ethereum Name Service ($ENS), LooksRare ($LOOKS) and ApeCoin ($APE).

Many investors who have filed their tax returns and received airdrops of new crypto during the 2021-22 financial year have likely declared them in their returns as income.

Shane Brunette, co-founder and chief executive officer of CryptoTaxCalculator, says investors who have already submitted their tax returns for the financial year should think about lodging an amendment, as they may be able to reduce their tax liability or receive a refund.

The ATO’s guidance also says airdrops of new crypto, provided for free, will have a “cost base” of zero against which the calculation of capital gains or losses is referenced if the crypto is subsequently sold or exchanged for another virtual currency.

Where the tokens are not free, the cost base will be the amount that was paid to acquire them, the ATO says.

Realised capital gains are subject to tax the financial year the gains are made.

If you hold your coin or token – or any other investment – for 12 months or more, you will likely be entitled to a capital gains tax discount.

If you make a capital loss, it can be used to reduce capital gains made in the same financial year or can be carried forward to future years.

Keeping track of crypto can be complex. There are providers of crypto tax software, where investors can download a spreadsheet of transactions from their exchange or crypto wallet.

The file of crypto transactions is then uploaded to the crypto tax software, which generates a year-end tax report that can be entered into tax returns, or provided to your tax agent.

Individuals have until October 31 to lodge their 2021-22 tax returns. Those with tax agents, and those who register with a tax agent by October 31, providing they have no outstanding issues with the ATO, have until the middle of May next year to lodge returns.

If in doubt about tax, seek the advice of a qualified tax professional.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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