Airdrops are a popular way to make new cryptocurrencies available to a wide audience. For investors, airdrops offer a great way to get crypto for free without investing any personal funds. However, you should be aware of the possible tax consequences involved in receiving airdropped tokens right from the start and act strategically. In this expert guide to airdrop taxes, we explain everything you need to know about the taxation of airdrops in Germany.
What are Airdrops?
An airdrop is a way to distribute cryptocurrencies or tokens for free to the largest possible group of people. This is usually done to generate interest in a new cryptocurrency and drive mass adoption. An airdrop can either take the form of a new cryptocurrency or an existing token. To receive the airdropped tokens, the recipient usually has to meet certain requirements or perform specific actions, such as subscribing to a newsletter or sharing a post on social media.
What are the Risks Associated with Airdrops?
Although crypto airdrops can potentially offer some benefits, there are also some risks to consider as outlined below.
Fraud and scams: Airdrops are a popular target for scammers. It’s important to be careful and not participate in airdrops that ask you to provide sensitive personal information.
Token Liquidity: Even if you receive free tokens in an airdrop, it can be difficult to find buyers. It’s important to consider the liquidity of the tokens you receive from an airdrop before you commit to them.
Tax implications: You must be familiar with the potential tax implications of receiving crypto from an airdrop and seek further assistance on a case-by-case basis.
How are Airdrops Taxed in Germany?
Receiving Airdropped Tokens
The inflow of crypto from an airdrop is tax-free if you were randomly selected for the airdrop or merely submitted your data via an online form for the technical distribution of the tokens, such as the wallet address.
The situation is different if an action is required to receive the airdrop. This is the case, for example, with Bounty Airdrops, where images or projects are shared on Twitter and the link must be entered via the online form as proof. In this case, the tokens you receive are taxable as “other income” according to §22 No.3 EStG based on their market value at the time of receipt.
Attention! Often the value of an airdrop token often drops rapidly after distribution. However, the tax liability arises directly upon receipt. You should assess the value at the time of sale to decide if it’s worth it and to avoid paying more in taxes later than the token’s worth in the end.
Receiving an airdrop, however, remains tax-free if you were selected as a token recipient randomly, even if a certain action is required. For example, when sharing on Twitter is a condition for participation in the random allocation.
Moreover, Accointing differentiates between different types of classifications and allows you to mark them as “Airdrop – non-taxable” or “Bounty – taxable”. This way you can make sure that your tax return is correct and complete.
Selling the Tokens
If you decide to sell the tokens you received in an airdrop, this may result in a taxable private sale transaction according to §23 EStG. The resulting gain or loss is calculated based on the difference between the market value of the cryptocurrency at the time of receipt and at the time of sale.
Note that the capital gain of an airdrop you hold for more than one year without selling it or exchanging it for another cryptocurrency is tax-free.
Token Documentation
Accuracy in recording airdrops: It’s important to document all the details associated with each airdrop. This includes the date, value, and the number of tokens received. This way, you’ll have all the necessary information at hand to correctly and completely fill out your tax return.
Correctly categorize airdrops for tax purposes: Airdrops can be taxable or non-taxable depending on how they were acquired. Therefore, it’s important to correctly categorize all airdrops based on the above criteria to ensure they’re correctly reported on your tax return.
Example: The Arbitrum Airdrop Taxation
The Arbitrum Airdrop is a distribution of tokens to users who have interacted with the Arbitrum network. Arbitrum has developed a set of criteria to determine which users are eligible for the airdrop and the size of the airdrop for each user. Each criterion is divided into several categories that allow larger airdrops for a higher category. The size of the airdrop depends on the specific combination of factors met, and eligible users will receive the tokens directly in their wallet. The criteria for users to be able to participate in the airdrop include:
- Connected to Arbitrum: users who have bridged funds in Arbitrum One or Arbitrum Nova.
- Transactions over time: users who have transacted during 2, 6 or 9 distinct months.
- Transaction frequency and interaction: users who conducted at least 4 or more than 100 transactions or interacted with at least 4, or more than 100 smart contracts.
- Transaction value: users who have conducted transactions with a total value of more than $10,000, $50,000, or $250,000.
- Assets bridged to Arbitrum One: Users who have deposited more than $10,000, $50,000 or $250,000 in assets.
- Activity on Arbitrum Nova: users who have performed more than 3, 5 or 10 transactions on Arbitrum Nova.
In this case, the airdrop distribution is not randomly selected, and meeting these criteria is a prerequisite for receiving the airdrop. This means that the inflow of ARB tokens is taxable as “other income” according to §22 No.3 EStG and can be marked as taxable with the classification “Bounty”.
How can Accointing help with your Airdrop Taxes?
Accointing is a crypto tax tracking tool for investors that documents all recorded crypto transactions and calculates the corresponding taxes. Here are some benefits of using Accointing:
- Easy to use: Accointing’s user-friendly interface makes it easy for you to track your crypto transactions and generate accurate tax reports. You don’t need to be a tax expert to prepare your crypto taxes.
- Integration with multiple exchanges and wallets: with over 400 lightning-fast integrations across exchanges, wallets, blockchains, and services, including Binance, Coinbase, Kraken, and more. You can connect your accounts to Accointing and automatically import all your transactions without having to manually enter each transaction.
- Detailed Reports: Our platform generates fully compliant tax reports that summarize your realized gains and losses, taxable income, and capital gains from margin trading. In addition, you can find supplementary files such as the import file for “Wiso Steuer”.
- Leading crypto portfolio tracking and insights tool: Take control of your crypto data with our crypto portfolio tracking and insights tool. Accointing’s portfolio dashboard lets you dive deep into your transactions and see your entire crypto portfolio at a glance. The dashboard summarizes your buy and sell data as well as net profit and total profit, so you can track everything in real time. This makes it easier for you to stay up-to-date and make informed decisions.
- Accurate Crypto Tax Calculator: Accointing’s advanced algorithm for calculating the cost-basis of each crypto transaction ensures that investors can accurately document their capital gains for tax purposes.
- Additional Tax Tools: We offer a Trading-Tax-Optimizer tool that predicts the tax implications of your trades before they are executed so you can meet your tax goals. Also, our Tax-Loss-Harvesting tool will identify unrealized losses in your portfolio so you can sell the assets and offset your capital gains.
- Expert Help: In addition to the “Crypto Tax Guide 2023” and “The 2023 Tax Return with Cryptocurrencies,” Accointing offers other resources to help you navigate the complex world of crypto taxes.
- Dedicated Customer Support: Accointing offers dedicated customer support to help you with any issues or questions you may have about the platform or your crypto taxes. You can contact the support team via email, live chat or the help-center and expect a prompt response.
