The world of crypto airdrops is exciting. Not only is it a great way to earn extra income but it also accounts for a good stock up of your digital assets for your portfolio.
While that’s a suitable addition to your existing income, do you know that the Indian Financial Budget 2022 also categorized the income derived from airdrops under virtual digital assets?
So are you liable to pay taxes on these free tokens?
But don’t let the legalities surrounding airdrops leave you feeling dropped. Our in-depth guide will take you on a journey through the nuances of tax on airdrops in India, from understanding the tax implications to reporting your airdrop income accurately.
Sit back and relax while we guide you through this uncharted territory and help you stay on the right side of the law.
So what are airdrops?
Let’s say a blockchain project or a new crypto token is about to be released.
Each of these projects runs a marketing campaign that gives away free tokens or coins to a certain group of people – typically to increase awareness and adoption of the project.
These airdrops could happen for multiple reasons including incentivizing people holding certain coins, rewarding community members, or distributing tokens to a new user base.
Participating in an airdrop requires you to hold a certain coin, and sign up for a certain service or action, typically including your involvement in promotional activities.
How to calculate your crypto airdrop income?
Airdrops are taxed as Income from other sources only if they have value – as on the date of receipt and are traded on exchanges or DEXes.
For example, If you received 100 XYZ tokens on Feb 06, 2023. The value of 1 XYZ token is Rs. 10. The taxable Income further is Rs.1000.
Crypto airdrops are considered gifts for tax purposes and could also be eligible for tax exemption. Check out our tax guide on Gifts.
Applicable Tax clause on Crypto Airdrops
Crypto airdrops are subject to income tax as per the union budget 2022 in India.
Your crypto airdrop income is taxed at applicable slab rates. This applies to a tax when you spend, sell, or swap your coins or tokens that you received from the airdrop (if there’s a profit).
The cost basis for the airdrops depends on the market value on the day you received these tokens/coins in INR.
Real-life scenario(s) of tax computation on crypto airdrops
Example 1 – Let’s say a person named Ravi receives 10,000 ABC tokens as Airdrop on April 01, 2022. There is no trading of ABC tokens either on exchanges or DEXs. This means, there’s no income from airdrops.
Example 2 – Now let’s assume a person named Riya receives 10,000 ABC tokens as Airdrop on April 01, 2022, too and there’s an involvement in the trading (exchanging, buying or selling) of ABC tokens on exchanges or Dexes. The ABC token is quoting a price of ₹10 on April 01, 2022. This means that Riya will have an income of ₹1,00,000 from airdrops at the time of receipt of airdrops.
In the second example, if there’s a subsequent sale of the tokens, the amount of ₹1,00,000 is considered as a cost of computing gains.
In case if Riya sells the tokens on June 01, 2022, when the price for the ABC token was ₹20, the taxable gains will be:
10,000 ABC tokens * (₹20 – ₹10) = ₹1,00,000 taxed at 30% this amount ( ₹1,00,000/- ) will be considered as a cost for computing gains on the subsequent sale of the tokens.
Some Ambiguities about Tax on Airdrops
There are a few areas that can be unclear when it comes to taxes on cryptocurrency airdrops:
The fair market value of airdropped tokens: There may be confusion over how to determine the fair market value of airdropped tokens, as their value may be highly volatile and may not be listed on major exchanges.
The timing of taxation: It is unclear when airdropped tokens should be considered taxable, as they may be received at different times and may not be immediately tradable.
Ways to reduce tax on crypto airdrops
Timely claims – While certain airdrops are directly deposited into your wallet, others may need to be claimed. The ones you can claim open a chance for you to create tax planning opportunities. So, until you don’t claim the airdrop, there’s no taxable income to be declared.
Calculating Crypto Taxes with KoinX
Tax doesn’t always have to be difficult, however.
KoinX is built to simplify your tax compliances for you. You can skip all the technicalities of crypto taxes yourself and let KoinX take care of it.