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Let's suppose I receive 100 XYZ tokens this week without conducting any service in return and sell them a week later.

My understanding is that I have to know the fair market value of one token at the time of receiving the gift and use that to figure out whether my disposal brought me a capital gain or a loss. Is this correct, or are airdrops and gifts excluded from the usual CGT rules?

An excerpt from this Airdrops section:

The disposal of a cryptoasset received through an airdrop may result in a chargeable gain for Capital Gains Tax, even if it’s not chargeable to Income Tax when it’s received. Where changes in value get brought into account as part of a computation of trade profits Income Tax will take priority over Capital Gains Tax.

It's a bit confusing. Does it mean that they can also be reported as losses? I'm asking because it seems kinda weird. For gains it makes absolute sense.

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No, you have this wrong. Except for special cases such as inheritance, your basis is what you paid for the asset. Since you didn't pay anything for the asset, the entire sale price is a capital gain.

There are three reasonable ways to account for this:

  1. When you receive the airdropped currency, you declare as income the fair market value for the currency. When you sell it, you have a gain or loss of the difference.

  2. When you receive the airdropped currency, you divide your basis between the original asset and the new asset. When you sell it, you have a gain of the difference between the portion of your basis attributed to the new asset and the sale price.

  3. When you sell the airdropped currency, you have a zero basis.

Which of these three methods is appropriate is a pretty hotly-debated question involving tricky questions about constructive receipt. You cannot treat it as a gift as it is not a gift under tax rules just as a dividend is not a gift. (Not that it really matters. Treating it as a gift would result in the same as 3 above. Your basis in a gift is the giver's basis, which is zero unless you can prove otherwise, which you can't for an airdrop.)

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  • Wow, thanks so much, this was so clarifying. Pardon my silliness, but I struggle to understand the "you divide your basis between the original asset and the new asset" part. What do you mean by "original" and "new"? – Paul Razvan Berg Apr 10 '20 at 1:02
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    Say you have 10 bitcoin that you paid $1,000 for. Then bitcoin splits into bitcoin and bitcoin cash and now you have 10 bitcoin cash as well. Say the bitcoin cash is worth $100. You would have a $100 basis in the bitcoin cash leaving a $900 basis in the bitcoin. (It is not clear under what circumstances this is legal. But it's not unreasonable. It's similar to what happened when GE spun off Wabtech and all GE stock holders got Wabtech stock.) – David Schwartz Apr 10 '20 at 4:08
  • @DavidSchwartz what about interest earned in crypto savings accounts (e.g. BlockFi or crypto.com earn)? It seems to me that also applies to the 3 reasonable ways well described above. What are your thoughts on this one? – Antonio Andrés Jun 7 '20 at 22:27
  • @AntonioAndrés The law is pretty clear that interest is regular income. – David Schwartz Jun 8 '20 at 1:42
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    @DavidSchwartz It's clear with fiat, not really clear with crypto (at least is not mentioned anywhere in gov.uk/government/publications/tax-on-cryptoassets/…. Please see below a response I've received in another thread. – Antonio Andrés Jun 8 '20 at 7:37
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Related to my comment above:

Since the UK government does NOT view bitcoin as currency, this is not a savings account in the traditional view, therefore Tax on savings interest is irrelevant here. Therefore you are looking at capital gains tax (as mentioned in the link to the government information page) on disposal. Just view the in interest as having a cost of zero (although will average on disposal to whatever you paid for the rest). This is similar to having crypto in a staking wallet (which earns interest). This is exactly the same as how you would deal with the disposal on other stored crypto (such as what you have in cold storage) If you are not disposing of them in the tax year, you will not have capital gains to declare, as you will only pay tax on disposal. The gains will count towards your capital gains limit - so for 2019-20 tax year, if you gain less than 20K profit (including all gains, e.g. from stock disposal, selling second property etc), you will not owe any tax.

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