Cryptocurrency

How are Crypto Airdrops Taxed in India

Snapshot: 

  • Introduction
  • How are Crypto Airdrops Taxed in India?
  • What are Airdrops?
  • How to Report Crypto Airdrops in your Tax Reports?
  • How to Calculate Crypto Airdrop Income? 
  • What are the Requirements for Receiving Airdrops?
  • Is Hard Fork Taxable?
  • Common Tax Calculation Issues with Crypto Airdrops
  • How to Prepare for Crypto Taxation Season in India

Introduction 

Acquiring cryptos has ways beyond investing in the assets. Though technically one would need to be invested to get access to newer tokens from the developers, but one such way is via crypto airdrops that we often hear about. One such recent occurrence has been when Do Kwon went the airdrop route as the revival plan following the LUNA crash 2022. Now, after the mention of various crypto taxes, the question that we may search an answer for is ‘’How will our airdrop crypto earnings be taxed’’? Well, the answer to crypto airdrop taxation is simple.

Are Crypto Airdrops Taxed in India?

In the latest ruling on crypto tax, tokens will be classified as VDAs’ Virtual Digital Assets. The burning question is will these free tokens be taxed too? The answer is yes, airdropped tokens are earned assets and fall under the 30% crypto tax ruling by Income Tax Department. 

So What are Airdrops?

Airdrops are a process of distributing free coins to individuals interested in crypto assets. Crypto or NFT airdrop is a promotional activity done by new ICO projects to create visibility amongst communities and get people to join the project. These tokens are airdropped through pre-programmed software to an individual’s crypto wallet. 

Airdrops are purely promotional and are not created to gain any capital from investors. Crypto tokens received via airdrops are treated as financial gains and a 30% crypto tax will be levied on them. 

How to Report Crypto Airdrops in your Tax Reports? 

When tax filing season arrives one can fetch the income made with airdrops and simply file it in the ITR under ‘Other Income’.  Any income that arises from interests are calculated in ‘Other Income’. 

Additional Read: Guide to Crypto Tax in India

How to Calculate Crypto Airdrop Income? 

To calculate the crypto airdrop income simply subtract 30% of the asset’s total appreciation. The remainder is your crypto airdrop income. For example, if you have earned INR 20,000 on ‘XYZ’ crypto-asset then your income after tax deductions comes to INR 17,000. 

Value at acquisition of XYZ INR 10,000
Earnings on sale INR 20,000
Tax Levied 30%
Tax paid INR 3,000
Total Income INR 17,000

What are the Requirements for Receiving Airdrops?

To receive an airdrop an individual must have a wallet that supports the crypto airdrop. For example, an ICO developed on Ethereum can be airdropped to an Ethereum-compatible wallet only. Also, an individual must remember the key phrase or passphrase to access the wallet in which they will receive the tokens. 

After the crash of Luna, Do Kwon proposed a revival plan which received positive votes from the community. The release of Luna 2.0 – was airdropped to token holders and other participants in the ecosystem. 

An individual who is a tax payer in India and has recently received Luna 2.0 tokens via airdrop will have to pay a 30% crypto tax as per the new crypto tax regime. 

Additional Reading: Terra LUNA 2.0 Airdrop Explained

Is Hard Fork taxable?

In the case of a hard fork where the blockchain splits in two and the holder of the native asset receives another token as a result of the split, a 30% crypto tax will be levied on the new asset received by the holder.  

An individual is also liable to pay an income tax of 30% even for swapping, selling or spending the tokens. No tax is levied on hodling crypto assets or transferring assets between wallets. 

For example, ‘ABC’ blockchain splits after a hard fork. The new blockchain generated is named ‘ABC CLASSIC’.It is advised by experts to claim the second token ‘ABC CLASSIC’ after a small period of time. 

Now, how does one calculate the crypto tax on the newly claimed tokens after the hard fork?

It’s simple, suppose you own 500 ABC tokens valued at 200 INR each, the newly minted 500 tokens that you claim after the split may not have the same value as the original token. 

So, your tax liability on the newly minted tokens will be calculated separately and won’t be bundled with the original asset. 

Value of the new tokens  No of tokens Crypto tax levied (%) Tax paid  Income from crypto
INR 100 500 30% INR 15,000.  INR 35,000

In the case of a soft fork, the blockchain does not split and does not extend any new assets to the holders. Which means there is no further tax liability in the case of a soft fork.

Wondering what is the difference between a hard fork and a soft fork?

To know more, Read: Hard Fork vs Soft Fork Explained: Which One is Better?

Common Tax Calculation Issues with Crypto Airdrops

With the new tax regime, one may face the following tax filing problems

Declined price of the airdropped crypto-asset

If the asset value declines drastically an individual may end up paying more in taxes. To mitigate this risk, one must keep a tab on the value of the assets.

Unsolicited airdropped crypto tokens

Sometimes crypto projects airdrop crypto tokens to an individual’s wallet without their consent. These tokens have very little value in the real world. It is best to report the airdropped tokens in your tax filing. 

Frequently Asked Questions on 30% Crypto In India Answered

How to Prepare for Crypto Taxation Season in India

A few things to remember when preparing for crypto tax filing 

  • It is important for investors to keep a track of their crypto gains and losses of every virtual digital asset.
  • Individuals earning profits on virtual digital assets have to file income tax returns through forms 1, 2, 3, or 4 as applicable. Businesses have to file income tax returns through form 5 or 6.
  • Keep all your VDA entries in one place for a hassle-free tax filing experience. 
  • If you are hodling assets that have appreciated, you need to file it in your tax returns and pay 30% crypto tax on the earned value.

Additional Reading: 1% TDS on Crypto in India 


Disclaimer: “The information and material contained are subject to change without prior notice including prices which may fluctuate based on market demand and supply.  The material available on the site is proprietary of CoinDCX, its parent, and its affiliates and is for informational purposes and informed investors only. This material is not: (i) an offer, or solicitation of an offer, to invest in, or to buy or sell, any interests or shares, or to participate in any investment or trading strategy, or (ii) intended to provide accounting, legal, or tax advice, or investment recommendations. Please note Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.”


 

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