I frequently get this question - is Income from Hackathons & Airdrops taxable?Hackathon prize money keeps rising each year as organizations learn to take advantage of their value. Runner-up cash prizes are now in the Lakhs, and grand-prize payouts are as high as One crore (when converted in INR). There is now a compelling argument for ambitious programmers to live off hackathons. So, Today we will delve deeper into the question of whether Income from Hackathons & Airdrops taxable?
We will discuss this in two sections, First Income from challenges / contests / hackathons and Second - Income from Airdrops.
Income from Programming challenges / contests / Hackathons :
Any income earned from coding challenges, contests or hackathons would most likely be taxed as Income Tax on winnings from Lottery, Game Shows, Puzzle, etc.
Though we understand that specialised skills are required to win in hackathons, same applies to contest winners of TV contests & reality shows such as Indian Idol and Dance India Dance. These shows offer huge chunks of prizes in cash as well as kind i.e. in the form of cars or houses etc. This form of income earned is taxable and TDS is deducted.
Many cryptocurrency programmers / cryptocurrency developers also get paid in Altcoins such as SUSHI, MATIC, etc. For the beginners, Altcoins are alternative cryptocurrencies that were launched after Bitcoin's success. They generally project themselves as better replacements for Bitcoin. Bitcoin's emergence as the first peer-to-peer digital currency has paved the way for many to follow. Most altcoins are trying to target any perceived drawbacks that Bitcoin has and come up with competitive advantages in newer versions.
There are dedicated website such as devpost.com/hackathons & devfolio.co/hackathons which run dedicated hackathons for Crypto programmers, Blockchain Developers and offer huge rewards in US Dollar, USDT or other coins.
How should winnings from Hackathons be Taxed in India?
Any such winnings should be taxed as Income Tax on winnings from Lottery, Game Shows, Puzzle, etc. Generally, Any major winnings like these are subjected to TDS rate of 30%. For example, even if someone wins a hackathon and get some cryptocurrency as prize money whose value is about INR 2 lakhs, the winner will have to pay applicable tax up to 30% on this amount or face adverse action from the Income Tax department. There are many factors that one need to be aware of while filing income tax return for winnings from such hackathons.
We specialise in Crypto Taxation and can guide in the right direction. So for any query, help or feedback you may schedule an appointment here - Appointment with CA. Please note the all consultations with the CA are Paid consultations.
Income from Airdrops
Some client are making substantial profits via Airdrops as well which prompts the question How should Airdrops be Taxed in India?
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).
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 services at CA Mitesh & Associates means:
- Clarification of all unclear issues
- Advice on right tax treatment of your income
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