Airdrops are essentially free cryptocurrencies that are distributed to holders of other cryptocurrencies. They are usually done by blockchain start-ups that want to create a community on their blockchain. They are usually decentralized and distributed over a peer-to-peer network.
History of Airdrops
Airdrops have been around since the early days of cryptocurrency, where it was a much simpler process to create free coins that were distributed to people who had computers and a network connection from early cryptocurrency projects. As the crypto world evolved into more sophisticated projects and new cryptocurrencies were invented, it became harder for smaller blockchains to create free coins for their community. Airdrops were created as a way for smaller blockchain projects and start-ups to gain enough audience, especially with altcoins which do not have large communities. Nowadays, they are used by pretty much all kinds of cryptocurrencies: Bitcoin, Ethereum (ETH), Litecoin (LTC) , Dogecoin (DOGE), Dash (DASH) and many others.
Why Are They Used?
An Airdrop occurs when a company distributes tokens or coins for free to holders of other cryptocurrencies, usually in an effort to attract attention or to build up brand loyalty before the project goes live. The idea can be traced back to World War II, when American pilots would drop swag like chocolate bars over Europe.
Airdrops are also used as marketing tools and akin to distributing flyers for now defunct “big box” retail stores.
What is the process? - How Do They Work?
Many people ask “how” these free tokens are distributed but keep in mind that airdrops are done by individuals and companies, not by the blockchain itself.
When an airdrop occurs, an individual or group will go on social media and announce they have found a fork in one of the cryptocurrencies on which they’re interested. The fork occurs when previously separate blockchains join together to form a new one – something that can happen anytime there’s more than one cryptocurrency.
A classic example was Ethereum Classic’s airdrop of 10,000 ETC tokens in December 2017. Participants just had to hold one or more types of cryptocurrency (typically the original coin) during the snapshot time on a specific block, and they could automatically receive ETC based on their holdings.
Tax Implications Of Airdrop In India
Airdrops will be taxed as Income from other sources at applicable slab rates only if they have value as on the date of receipt and are traded in exchanges or DEXes.
Continuing the example: If Mehul sold the tokens on April 03, 2021, when the price was Rs.20 per ABC tokens.
Example 1: Rahul received 10,000 ABC tokens as Airdrop on April 01, 2021. There is no trading of ABC tokens either on exchanges or Dexes.
In this case, Rahul will not have any Income from airdrops.
Example 2: Mehul received 10,000 ABC tokens as Airdrop on April 01, 2021. There is trading of ABC tokens on exchanges or Dexes. ABC token is quoting a price of Rs.10 on April 01,2021.
In this case, Mehul will have any Income from airdrops of Rs.1,00,000/- at the time of receipt of airdrops, and this amount will be considered as a cost for computing gains on the subsequent sale of the tokens.
His taxable gains will be 10,000 ABC tokens * (Rs.20 – Rs.10) = Rs.1,00,000 taxed as Capital gains at applicable rates.