February 2021 Tax Alert


More guidance on cryptoassets – hard forks and airdrops explained

Tax Alert - February 2021

By Ian Fay and Alex Chang

Following on from our previous article about investing in cryptocurrency, Inland Revenue (IR) has issued further guidance in the form of an issues paper “Income tax – Tax Treatment of cryptoassets received from blockchain forks and airdrops”. The issues paper sets out initial views on how tax laws may apply to these more novel situations. However, it also provides more technical detail on the tax treatment of cryptoassets and once finalised, it will add to a growing library of tax analysis related to cryptocurrencies.

What are blockchain forks and airdrops?

The world of cryptoassets has many terminologies, for the purposes of the latest guidance the following terms are explained:

a) Blockchain: A blockchain is a type of distributed ledger technology, providing a digital record of transactions that is shared and maintained by users across the network.
b) Hard fork: A hard fork (sometimes also referred to as a “chain split”) changes the protocol code to create a new version of the blockchain alongside the old version, thus creating a new token which operates under the rules of the amended protocol while the original token continues to operate under the existing protocol.
c) Soft fork: A soft fork also updates the protocol, however, it is intended to be adopted by all users on the network and thus no new coin is expected to be created (the tax treatment of soft forks is not expanded on in the issues paper).
d) Airdrops: 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.

Taxability of cryptoassets from blockchain forks and airdrops
1. Receipt of cryptoassets from a hard fork and/or airdrops

As a general point, the receipt of new cryptoassets from a hard fork and/or airdrop will not be income to the recipient in many cases. However, there will be a number instances where the receipt of new cryptoassets may be income, including where the recipient has a cryptoasset business (such as a dealing or mining business) or is involved in a profit-making undertaking or scheme involving acquisitions of airdropped or forked cryptoassets.

2. Disposals of cryptoassets

Generally, disposals of cryptoassets are taxable if you acquire the cryptoassets for the purpose of disposing of them. However, the taxability of disposing of these cryptoassets depends on the person’s circumstances. Disposal includes selling them for fiat (traditional) currencies, exchanging to another type of cryptoassets or using the cryptoassets to acquire goods. A question that exists around hard forks and airdrops is whether the recipient has done anything to acquire the cryptoasset (so as to assess intention) or whether they are received passively.

Disposals of cryptoassets received from a hard fork

IR is of the opinion that the purpose of acquiring new cryptoassets from a hard fork should remain the same as the purpose of acquiring the original cryptoassets i.e. similar to the tax treatment of a share subdivision and the treatment of shares under some demergers. For example, if the original purpose of acquiring the cryptoassets was to dispose of them, any additional cryptoassets acquired from a hard fork will also be treated as being acquired with the same purpose.

Dealers or mining businesses will be subject to trading stock rules and taxable that way.

Disposals of cryptoassets received from airdrop

Cryptoassets that are received from airdrop by a cryptoasset business (i.e. a cryptoasset dealing or mining business) are likely to be trading stock of the business and subject to the trading stock rules. Likewise, the disposal of cryptoassets received from airdrop which is part of a profit-making undertaking or scheme are taxable.

In cases where the person had done something to become entitled to receive or take possession of the airdropped cryptoassets (i.e. signed up online to receive an airdrop), disposals of these cryptoassets are likely to be taxable if the person acquired them for the purpose of disposal. Conversely, if the person is acquiring for the purpose of holding for the long term to generate income other than from disposal, any subsequent disposal will arguably be non-taxable.

Interestingly, the disposal of cryptoassets from airdrop is treated differently in some other jurisdictions.

Cost of acquisition of cryptoassets received from a hard fork or airdrop

If the disposal of a hard fork or airdrop cryptoasset is taxable, it is worth noting that the full disposal value will be taxable as there was no cost incurred in acquiring the cryptoasset (other than transaction fees, if any). However, in cases where a person is taxed on the receipt of cryptoassets and again on disposal, a cost should be attributed to the cryptoassets at the time of their disposal to ensure there is no double taxation.

Deloitte’s Comment: More complexity on your taxes when you invest in cryptoassets

While IR has released guidance to enlighten taxpayers on the tax treatment of cryptoassets, there is still complexity relating to the taxability around buying and selling cryptoassets from blockchain forks and airdrops.

As mentioned in our previous article, IR has been gathering data on anyone who transacts in cryptoassets. If you have significant transactions relating to cryptoassets and you are of the view that the transactions are not taxable, then be prepared to support this position if IR ask questions.

If you have any queries on the taxability of cryptoassets or you are unsure of your tax obligations, please seek advice from your usual Deloitte tax advisors.

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