Crypto is not a new thing anymore. Being surrounded by thousands of cryptocurrencies, many users start investing in one or more crypto projects. And considering all the investment opportunities, the profits cannot be too late for the party.
Buying and trading crypto can lead to pretty high returns when done right. However, in recent years, many crypto projects have organized special events to reward their early supporters with free crypto or digital collectibles. Such events are usually called crypto or NFT airdrops, depending on what the rewards consist of.
Crypto and NFT airdrops are a great way of diversifying your portfolio, but one question bothers many crypto enthusiasts: are airdrops taxable? So, let’s find out more about how crypto airdrops are seen by financial institutions and what users have to do once they receive a reward through an airdrop.
What Is a Crypto Airdrop? How Does It Work?
A crypto airdrop is a special event organized by crypto startups to gain popularity and build a community around their products or services.
Crypto airdrops are usually organized during a fixed period, requiring users to complete various tasks to be rewarded. Most tasks are related to following the crypto project on various channels, sharing a post, retweeting a pinned tweet, referring a friend, or registering on an airdrop page.
After the airdrop ends, the organizers reward users according to how many tasks they complete. Users can claim rewards or send them directly to their wallets, depending on how the airdrop was organized. For instance, if a crypto airdrop requires you to enter your crypto wallet address when signing up, you may receive the reward directly to your wallet.
Crypto airdrops have many advantages, such as increasing the project’s popularity, rewarding early investors, acquiring new supporters, and incentivizing the community. And this is probably why they became so popular. These days, many crypto enthusiasts try their luck by signing up in various crypto or NFT airdrops, and this leads to significant crypto rewards.
Just like crypto airdrops, NFT airdrops are organized by new projects to increase their popularity. The main difference is that instead of receiving tokens as a reward, users get rewarded with NFTs. Although the NFT rewards may not bring significant profits in the first place, once an NFT collection becomes popular, NFT holders can sometimes sell their digital collectibles for insanely high prices.
Are Crypto Airdrops Taxable?
At the moment, crypto airdrops are taxed differently depending on the country. For instance, while in Portugal, Singapore, Malta, or Germany, there are little to no taxes for crypto airdrops and crypto gains in general, other countries, such as the US, the UK, Canada, or Australia, did set some taxes for the crypto rewards.
Let’s see how each country sees and taxes crypto airdrops.
Crypto Tax-Free Countries for Airdrop Rewards
In certain countries, crypto is not taxable, at least in most situations. The crypto tax-free countries include:
- Germany – Free unless you sell it with profits over €600, before the year elapses;
- Singapore – Crypto is considered intangible in what concerns taxes;
- Malta – Long-term capital gains are not taxed, but a 0%-35% Business Income tax may be applied on crypto trading;
- Portugal – Crypto investment income, capital gains, and crypto transactions are not subjects to taxes;
- Belarus – Does not have taxes on crypto yet;
- Switzerland – Investors do not have to pay Capital Gains Taxes, but they may be required to pay Income Taxes and Wealth Taxes;
- Puerto Rico – Does not tax capital gains, but requires investors to pay a Lower Territorial Income Tax;
- El Salvador – Bitcoin is legal tender, no taxes are applied for crypto, including capital gains;
- The Cayman Islands – Crypto tax-free;
- Italy – Crypto airdrop rewards are not taxable, unless you sell the reward for over $58,232 (€51,645 or 100 million old lire);
- Monaco – Earning, holding, and selling crypto are not taxed;
- The EAU – Crypto tax-free, encourages crypto payments in real estate and luxury cars industries;
- Hong Kong – Crypto tax-free;
- Malaysia – Crypto is tax free for individual investors, but businesses may be required to pay an Income Tax.
In some of these countries, you will not be required to pay taxes for the rewards you get during crypto airdrops. However, if you decide to sell the crypto you previously won during such events, you may have to pay capital gains taxes. And Germany is one great example in this case.
While Germany does not consider crypto as a capital asset, this approach applies to the users who decide to hold their assets. If you decide to sell crypto, you may need to pay some taxes. For instance, if you got a crypto reward in June 2023 and you want to sell it before the year elapses, you will have to pay a capital gains tax, unless the profits you make are lower than €600.
On the other hand, if you stake crypto to generate more income, you will have to pay taxes for the crypto you earn for the first 10 years you hold it. When 10 years pass, your crypto will be tax-free.
Crypto Taxes in Other Countries
In the US, those who get rewards from crypto airdrops should know they are classified as income and taxed at the regular Income Tax bracket. Along with crypto airdrop rewards, other crypto transactions taxed as regular income include staking rewards, liquidity pools, mining tokens, referral bonuses, and crypto payments for those who choose to get paid in crypto.
Basically, the IRS considers crypto airdrop rewards some bonuses, and to report the income tax for the reward to the IRS (The Internal Revenue Service), you should fill in Schedule 1 Form 1040.
The UK did not go too far from the US and considers crypto airdrop rewards bonuses in most cases. The HMRC (HM Revenue and Customs) requires crypto enthusiasts to report any crypto-related gains in the Self-Assessment Tax Return. Crypto airdrop rewards are classified as regular income and are taxed at the regular Income Tax bracket.
In the UK, crypto payments, mining tokens, staking rewards, liquidity pools, and other cryptocurrency transactions are also taxed as regular income.
Australia has similar crypto-related regulations. Thus, crypto transactions are classified as income and taxed at the regular income tax bracket. However, the main difference between Australia and the UK or the US is that the ATO (Australian Taxation Office) did not set taxes for initial allocation airdrops.
Crypto investors in Australia should declare their profits from crypto airdrops in their Individual Tax Return Forms.
In Canada, crypto is usually taxable. According to the CRA (Canada Revenue Agency), crypto is subject to Income Tax. Thus, crypto investors have to pay income tax on half of any crypto gains from dispositions of crypto. Furthermore, regarding any additional income from crypto, such gains will be subject to the usual Federal and Provincial tax rate.
While there are not too many crypto-related taxes in Andorra, users still have to pay a 10% tax for selling crypto. Thus, if you want to sell the reward you get during a crypto airdrop, you will have to pay a tax, and 10% might seem a little bit much for some investors.
India did change the rules a little in what concerns crypto income, and this also includes crypto airdrop income. In 2022, the Union Budget of 2022 announcement included information about income from digital assets, including crypto. Thus, transfers are taxed at a 30% rate.
The Netherlands set a 31% tax on crypto, no matter the type of crypto transaction. Thus, be it crypto airdrop reward, staking rewards, mining tokens, liquidity pools, or other types of crypto income, the crypto you got will be taxed at a 31% rate.
Income vs Capital Gains Taxes
It is essential to note that, in some cases, you may need to pay multiple taxes. And this depends on how you receive crypto as well as on how and when you dispose of it.
Thus, if you receive $100 worth of crypto during an airdrop, you will most probably have to report it and pay an Income Tax according to the country you are based in. Afterward, you may want to sell $50 worth of crypto from your received tokens. If you make some profits when selling those tokens, you will have to report the capital gains and pay taxes again.
Do you pay taxes on crypto airdrops?
Crypto airdrop rewards are usually classified as income and, therefore, taxable. However, it depends on the country and its regulations concerning cryptocurrencies.
Which country is crypto tax-free?
Multiple countries are crypto-tax-free, including Germany, Portugal, Singapore, Malta, Switzerland, and Malaysia. However, depending on what you plan to do with the crypto you earn, you may have to pay specific taxes at some point.
Are crypto airdrops taxable UK?
Yes. In the UK, crypto airdrops are considered bonuses and are classified as income. Thus, crypto enthusiasts who win rewards in crypto airdrops must report them and pay a regular Income Tax.
How do I report airdrop income?
Depending on the country you are based in, you have to report the airdrop income by filling in various forms. For instance, in the US, you will report the airdrop income to the IRS through Schedule 1 Form 1040, while in the UK, you should report the crypto airdrop reward to the HMRC through the Self-Assessment Tax Return.
The crypto industry has become extremely popular, and with thousands of crypto projects available and hundreds of millions of crypto users worldwide, it is no wonder that so many startups have decided to organize crypto or NFT airdrops.
Crypto airdrops are special events organized by crypto startups to build a community around their project, increase their popularity, reward early investors, and incentivize their users. Crypto or NFT airdrops can offer users significant rewards. However, one question bothers many crypto enthusiasts: are crypto airdrops taxable?
Crypto airdrops winners must report their rewards, especially in certain countries like the US, the UK, Canada, or Australia.
On the other hand, some countries did not set too many taxes for crypto airdrop income. The most popular are Portugal, Germany, Singapore, Malta, and Switzerland.
Still, it is extremely important how you plan to use the tokens or NFTs you won during an airdrop, as some countries set additional taxes for capital gains. Thus, if you plan to sell the crypto you earned, you should report your profits.