The taxation process is becoming complex and progressing towards faultlessness as we advance through various technologies and civilizations. As a technologically advanced period when crypto-based regulations are getting some clarity, various governments around the world have implemented sophisticated taxation processes.
Particularly the West has studied the crypto economy deeply and has made a complex tax system, where you can find taxation rules even for a regular airdrop. European countries, especially the UK, are very keen on blockchain taxes.
This article will get into airdrop taxation with the UK in focus, where the tax collection is administered by HMRC or His Majesty’s Revenue and Customs, a non-ministerial department headed by senior civil servants with expertise who work closely with cabinet ministers.
How Airdrops Taxation Works in the UK?
There isn’t yet a specific category for crypto taxes in the UK. Instead, your crypto will be classified into Capital Gains or Income Tax according to the nature of the asset. If it is a regular airdrop, you should pay the Capital Gains Tax while selling in profit. The tax ranges from 10% to 20%, and it is taken solely from the profits. You don’t need to pay any taxes as long as you HODL the asset without selling.
Meanwhile, the airdrop you receive as a bounty like the rewards of participating in a testnet, or a mining or staking process, will be considered under the Income Tax, ranging from 20% to 45%. If there are tasks inside the airdrop campaign like promoting the platform on social media, it will fit into Income Tax. Also, you still have to pay Capital Gains Tax when you make a profit.
If you are a classified trader under HMRC, independent of regular airdrop or bounty, you will be taxed under the Income Tax. All the blockchain-based transactions made by a professional trader are considered trading income by the HMRC. Let’s get into some examples.
How Your Airdrop Will Be Taxed? Examples of Airdrop Taxation
All the airdrops that generate profit for the receiver are subjected to the Capital Gains tax, regardless of the nature of the drop. If you receive a £1000 airdrop, you should add it as income in your tax report. If you sell the tokens when it reaches double the price, £2000, you should pay the income tax along with the Capital Gain tax.
This is because the airdrop generated additional income for you. Then the Capital Gain will be £1000. That is Sale Price (£2000) – Initial Price (£1000) = Capital Gain (£1000). From this £1000, you should pay a minimum of 10% as Capital Gain tax. Next, you have to pay a minimum of 20% income tax. This is just an example. Keep in mind that up to £12,570 of personal money has 0% tax in the UK. Also, if the airdrop you receive has zero market value, then you don’t have a tax burden.
How to Manage Your Airdrop Tax?
As a complex system of taxation, users need some expertise to handle it. Also, there are various techniques to minimize taxation. If you have enough money to hire an expert to manage your taxes, it will be the best idea. Another thing to look for is the allowance. There are various allowances and other considerations for traders, including tax-exempt gains in special scenarios. Also, there are special considerations if you lose any money through crypto. Here is the latest tax rates list:
| Tax | Income Range | Income Tax Rate |
|---|---|---|
| Personal Allowance | Up to 12,570£ | 0% |
| Basic Rate | 12,571£ – 50,270£ | 20% |
| Higher Rate | 50,271£ – 125,139£ | 40% |
| Additional Rate | Over 125,140£ | 45% |
What Will be the Future of Airdrop Taxation?
Taxation by a state-based authority for a decentralized asset itself is ironic. However, the majority of users are comfortable with an authority controlling the transactions because it provides safety and security. Also, the tax is converted to the welfare of the citizens, including the taxpayers. So, more regulations and complex tax processes can be expected in the near future.
Most of the nations in the European Union are strict in terms of taxes, so, make sure to include all the airdrops you have accumulated in the tax-based data. Failing to report income, or hiding the capital gains, are serious offenses. Avoid all these silly mistakes and try to act as a good tax-paying citizen.