Airdrops be Taxed in India? 2021 | cryptocurrencies | Crypto Taxes CA

How should Airdrops be Taxed in India? 2021

Recently, a client approached me wherein he had made substantial profits via Airdrops. This prompted me to write today's article focusing on How should Airdrops be Taxed in India? 2021

What is Airdrops

Airdrops are free coins that are sent to the wallet of an Cryptocurrency Trader or investor. Coins are generally airdropped to the wallet by ICO issuers or an existing  blockchain network to increase awareness, improve marketing and publicity for the project. Sometimes you may get coins through airdrops, and you may not even know about it. They are basically Free Cryptocurrency for traders or investor issued during or before the launch of an ICO (initial coin offering). An initial coin offering (ICO) is the cryptocurrency industry's equivalent to an initial public offering (IPO).

What are the requirements for receiving airdrops?

In order to receive airdrops, one needs a suitable wallet, which should be able to receive as many different cryptocurrencies as possible. Wallets that work on the basis of the Ethereum blockchain have proven to be particularly practical, because many airdrops are backed by ERC-20 tokens based on this blockchain. Thus, for example, a credit of cryptocurrencies can be issued to the wallet on which the beneficiary holds a certain amount of the cryptocurrency ether (ETH).

It is also possible to get access to a new cryptocurrency by proving that you hold a certain amount of cryptocurrency (e.g. Bitcoin) on another blockchain. The cryptocurrencies issued by airdrop are either created directly in the wallet of the recipient or are transferred from a pool of the issuer to the recipient wallet.

How should Airdrops be Taxed in India?

In US, who are at the forefront for taxation law on cryptocurrencies, the IRS has specified that new coins received through an airdrop should be taxed as ordinary income. Therefore, Crypto Traders owe income taxes on new coins they have in their wallet as a result of an airdrop (regardless of whether they intended to own these coins or not). The amount of income is the fair market value of the airdropped coins at the time they are received in the wallet.

I think in India, the stand would be similiar and any new coins received through an airdrop should be taxed as ordinary income. It should be reported under the head - Income from other sources and taxed accordingly. 

This does have the effect of crypto trader / investor owing income taxes on their cryptocurrencies even if they are just a HODLer, holding coins without proactively making any transactions.

Let’s look at an example. Say Arjun has 1,000 Ripple (XRP) on WazirX and he receives 1,000 SPARK tokens airdropped by the Flare network. He needs to report the newly received tokens as taxable ordinary income reported under the head - Income from other sources (It's not a capital gain). This is true whether or not Arjun sells the token.

Let’s say the fair market value of the SPARK at the time he receives it is INR 300. He will have to pay ordinary income taxes on 3 lakhs (INR 300 x 1,000). In addition, the amount Arjun reports as ordinary income becomes his basis for the new SPARK (INR 3,00,000), and he will use it to calculate capital gains/losses if/when he sells his SPARK in the future.

Crypto Tax consulting at CA Mitesh & Associates means: