Hard forks and airdrops – confused yet?

By December 23, 2020 No Comments

If you have clients who dabble in the cryptoasset space, then the above terms potentially do not create a somewhat blank expression on your face when you hear them.

Well IR (along with numerous taxing authorities around the globe) is certainly in catch-up mode as the use of cryptoassets and distributed ledger technology (blockchain) becomes increasingly common, and taxpayers seek clarification from the Revenue as to the tax treatment of various types of cryptoasset transactions and arrangements.

In this regard, IR has recently released Issues Paper 14 – Income tax – tax treatment of cryptoassets received from blockchain forks and airdrops.

When it comes to cryptoassets transactions and arrangements, the starting point to remember I would suggest, is that at this point in time, there are no special tax rules – so it’s just working with what you already know in terms of revenue recognition concepts, expense deductibility criteria etc.

The biggest challenge I find, is getting your head around the new terminology and understanding exactly what is the nature, or character, of the ‘thing’ your client has, or is about to, receive, and then how to place a value on that ‘thing’ in order to reflect an amount in the tax return.

The Issues Paper refers to a ‘hard fork’ as a change to protocol code, to in essence create a new version of the blockchain and therefore a new ‘token’, which operates under the rules of the amended protocol while the original token continues to operate under the existing protocol – as simple as learning you’re ABC’s isn’t it.

An ‘airdrop’ is the other new term for me, and no, it has nothing to do with sharing photos on your mobile phone! In the world of cryptoassets, an airdrop is the distribution of tokens without compensation, i.e., for free, generally undertaken with a view to increasing awareness of a new token, particularly amongst ‘influencers’, and to increase liquidity in the early stages of a new token project.

Issue Paper 14 has three focus areas:

  1. The tax consequences of receiving cryptoassets from a blockchain hard fork or airdrop.
  2. The tax consequences of disposing of cryptoassets received from a hard fork or airdrop.
  3. The cost of the cryptoassets for deductibility purposes.

In conclusion, very briefly, as the Issues Paper is 55 pages in length:

  1. The receipt of new cryptoassets from a hard fork or airdrop will not be income to the recipient in many cases. However, the receipt of new cryptoassets may be income of the recipient if they:
  • have a cryptoasset business (such as a dealing or mining business),
  • have a profit-making undertaking or scheme involving acquisitions of airdropped or forked cryptoassets,
  • receive airdropped cryptoassets as payment for services provided, or
  • receive airdropped cryptoassets on a regular basis such that the receipts have the hallmarks of income.
  1. Whether amounts received from disposing of these cryptoassets are taxable depends on the person’s circumstances – cryptoasset business, section CB 3 or CB 4 considerations.
  2. No deductions are generally available for the cost of the cryptoassets received from a hard fork or an airdrop, as the person has not incurred any expenditure in acquiring them. However, transaction fees incurred may be included as part of the cost of acquiring such cryptoassets.

The deadline for comment on IRRUIP14 is 1st February 2021.

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