Airdrop Tax: HMRC Guidance explained + Instructions [2023]

Can there be such a thing as free money? We’re taking a look at how the UK’s HMRC treats airdrops for tax purposes, why the two types of airdrops are taxed differently, and when your airdrop is tax-free.

This guide is part of our series UK Crypto Taxes.

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What is an airdrop and how to receive one?

An airdrop refers to the free distribution of a cryptocurrency token or coin, usually to promote a new digital currency. It's typically distributed to existing holders of a particular blockchain currency, like Bitcoin or Ethereum. 

To receive an airdrop, you generally need to hold a specific cryptocurrency at a certain time or participate in a particular network activity. 

It's vital to have a compatible wallet that supports the airdropped tokens, and be part of a community or network where the airdrop occurs. 

Always exercise caution, as fraudulent airdrops exist, aiming to steal personal or financial information!

The different kinds of airdrops

When talking about airdrops – specifically in the context of airdrop taxation – it is important to understand the distinction between the two kinds of airdrops: Airdrops and Bounties.

• An airdrop is the free distribution of cryptocurrency tokens or coins to holders of an existing blockchain currency. It's often used to engage potential users in a new project.
• A bounty is a reward offered for completing specific tasks, such as bug reporting, promoting a project on social media, or contributing to development.

While airdrops distribute tokens without any expectation of work or contribution, bounties require active participation and effort in the project. Both are marketing strategies in the crypto space, but airdrops are about mass engagement, while bounties target individual contributions and specific tasks.

For example, in 2020, the decentralized finance (DeFi) platform Uniswap airdropped its governance token, UNI, to users who had interacted with the protocol before a specific date. Existing users found 400 UNI tokens in their wallets, which was a significant value at the time of the airdrop.

Receiving Bounties

<div fs-richtext-component="tax-status-income-tax" class="tax-status-pills"><div>Income Tax</div></div>

Receiving a bounty in exchange for an activity or service qualifies as taxable income. In this case, you need to declare any bounties you received as “miscellaneous income” on your Self-Assessment.

Income Tax rates range from 20% to 45%, depending on your tax bracket, and you might benefit from tax allowances.

Read more about UK Crypto Tax Rates and UK Crypto Tax-Free Allowances.

Receiving Airdrops

<div fs-richtext-component="tax-status-tax-free" class="tax-status-pills tax-free"><div>Tax Free</div></div>

HMRC specifies that Income Tax does not apply to any airdropped tokens received without doing anything in return. This includes tokens that are not received as part of a trade or business involving cryptoasset exchange tokens or mining.

Keep in mind that you will still have to pay Capital Gains Tax when you dispose of the airdrop. 

Continue reading: How to avoid or reduce crypto taxes in the UK.

Trading Income

<div fs-richtext-component="tax-status-income-tax" class="tax-status-pills"><div>Income Tax</div></div>

If you are considered a trader by HMRC, both types of airdrop qualify as trading income and need to be included in your tax return so they can be subjected to income tax. 

Read this to find out if you are a Crypto Investor or Trader?

Selling Airdrops or Bounties

<div fs-richtext-component="tax-status-capital-gains-tax" class="tax-status-pills"><div>Capital Gains Tax</div></div>

Any capital gain resulting from the sale of an airdrop or bounty is subject to Capital Gains Tax.

The gain is calculated based on the difference between the market value at the time of the disposal and the market value at the time of receipt.

The Capital Gains Tax rate ranges from 10% to 20%, depending on your income bracket.

Learn more about calculating your cost basis: UK Cost Basis Methods.

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