What is a Crypto Airdrop?
For new cryptocurrency, it can be difficult to convince consumers to use or purchase a coin in its early stages. With no publicity, followers, or trading volume, new projects need to find innovative ways to market the currency in order to reach the consumers. Airdrops is one common tool to do this.
One way to promote coins and increase uptake is through airdrops, where a consumer receives free coins or tokens ‘airdropped’ into their crypto wallet. Blockchain based projects like to use airdropping as a marketing tool to promote awareness and engage consumers, helping build the early value in their token and increasing the overall supply.
An airdrop involves sending a small amount of a new coin to targeted members of a selected blockchain platform. To qualify, the wallet holder may need to hold a minimum amount of a certain coin and they may even be given multiple Airdrops if their wallet remains above a minimum balance for a sustained period. Some Airdrops may require the receiver to perform a task, such as a social media post, to qualify for the crypto drop.
Airdrops have the potential to provide real value to a consumer. In 2020, Uniswap released a native coin, UNI, by dropping it into the accounts of all users on its platform that had made at least 1 trade prior to a certain date. The coin initially traded for between $2-$4 USD before rising to $30USD in April 2020, netting those who had received the airdropped tokens $12,000 USD.
Beware of Airdrop Scams
Airdrops are common practice, but they can be used to scam consumers. You should always be wary of Airdrops that require you to send funds to its project or require you to send personal information. Dusting is another type of well-known Airdrop-scam, where a hacker sends a small amount of coin to a large number of wallets, and the user doesn’t realise they have received any coins. The attackers aim is to link wallets to companies and individuals by following the transactions the wallet makes and tracking these transactions to the user. The overall aim being to carry out phishing or other cyber attacks directly on the user at a later date after they have linked the wallet to the consumer.
Although it may feel like a free coin, the ATO considers airdropped coins and tokens to be ordinary income. Anything you receive through an airdrop is required to be counted as ordinary income equal to its value at the time you received it. When it is sold, you will be required to pay capital gains tax on the difference between the value of the coin when you received it (cost base) and the value of the coin when it was sold. Often a token will have a very low market value when it was airdropped. Crypto investors and their advisors need to ascertain how all their existing coins were acquired to track whether there are any outstanding tax liabilities.
The ATO continues to track and closely monitor crypto related trading activity, looking to crackdown on taxpayers who fail to report their crypto-related capital gains and losses. If you have received tokens through an airdrop, or are considering airdrops for your current project, Chamberlains Cryptocurrency Team can help you better understand your tax obligations.