The global crypto market cap is currently in excess of USD 1.3 trillion. A year ago, this figure was a mere USD 0.26 trillion

Regulators and tax authorities globally are responding to the increased interest in crypto shown by institutional investors and the general public. Recently, Inland Revenue released final versions of its view in response to 2 “Questions we’ve been asked”:

  • QB 21/06 Income tax - tax treatment of cryptoassets received from an airdrop
  • QB 21/07 Income tax - tax treatment of cryptoassets received from a hard fork

Taxpayers should take note that in addition to disposals, the IRD views certain receipts of cryptoassets as taxable.

QB 21/06 concludes that the receipt of airdropped cryptoassets (essentially, free tokens) is taxable where a person:

  • has a cryptoasset business;
  • acquired the cryptoassets as part of a profit-making undertaking or scheme;
  • provided services to receive the airdrop (and the cryptoassets are payment for the services provided); or
  • receives airdrops regularly and the receipt has hallmarks of income.

In other cases, the receipt may not be taxable.

QB 21/06 also concludes that the disposal of airdropped cryptoassets is taxable where a person:

  • has a cryptoasset business;
  • disposed of the cryptoassets as part of a profit-making undertaking or scheme;
  • provided services to receive the airdrop; or
  • acquired the cryptoassets for their disposal.

In many cases, the disposal will be taxable. However, in some special cases, airdropped cryptoassets may be passively acquired and will not be acquired for the purpose of disposal.

QB 21/07 concludes that the receipt of cryptoassets from a hard fork (similar to a share split) is taxable where a person:

  • has a cryptoasset business; or
  • acquired the cryptoassets as part of a profit-making undertaking or scheme.

In other cases, the receipt is not taxable.

QB 21/07 also concludes that the disposal of cryptoassets were received from a hard fork is taxable where a person:

  • has a cryptoasset business;
  • disposed of the cryptoassets as part of a profit-making undertaking or scheme;
  • acquired the cryptoassets for their disposal; or
  • acquired the original cryptoassets for the purpose of disposing of them (where the person receives the new cryptoassets through an exchange).

In most cases, the IRD concludes, the disposal will be taxable.

It is noted that the QBs do not appear to distinguish between different types of cryptoassets (which the IRD defines as “cryptographically secured digital representations of value that can be transferred, stored or traded electronically. They use some form of distributed ledger technology such as blockchain. Cryptoassets may also commonly be referred to as cryptocurrencies, digital tokens or virtual currencies.”). The past year has seen a significant uptake not only in traditional cryptocurrencies (e.g., Bitcoin) but also decentralised finance cryptos (broadly, those using blockchain which seek to replicate traditional financial instruments). The use of blockchain technology is limited only by creativity and technological capability, and includes areas such as supply chain management, staking, and stablecoins (i.e., those with value pegged to some other currency or commodity), among others.

The OECD, in its 2020 publication, Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues, specifically recognised the need for “developing appropriate tax guidance in response to emerging technological developments, including stablecoins, Central Bank Digital Currencies, Proof-of-Stake and decentralised finance, for which existing frameworks may not be appropriate.”