Tax Implications of Crypto Airdrops in the Philippines

In this paper, Atty. Rafael Padilla discusses the considerations when it comes to taxes for crypto airdrops.

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Tax Implications of Airdrops

Atty. Rafael Padilla

Professor of Law, San Beda Alabang School of Law

05 April 2024

Concept of airdrop; examples

An airdrop is a method of distributing tokens to multiple wallet addresses that could occur in different scenarios and for various purposes.

  • An airdrop might happen as a result of a contentious hard fork (e.g., Bitcoin Cash in 2017).
  • An airdrop may be given by a blockchain-based protocol to reward its users (e.g., Uniswap gave an airdrop for its existing users when it launched its UNI governance token in 2020).
  • It could also be given by a new project to existing holders of a particular cryptocurrency (e.g., Songbird’s SGB token airdrop in 2022 for Ripple XRP holders).
  • It is also common for many crypto startups to airdrop their new tokens on existing wallet addresses or exchange accounts as a way to create awareness about their projects (e.g., IOST in early 2018).
  • Lastly, tokens can be airdropped for no particular reason as in the case of the memecoins, like the airdrop of Lechon (LECHN) tokens for the #CryptoPH community in 2020.

Status of crypto tax in the Philippines

As of April 2024, no guidance, ruling or revenue regulation has been issued by the Department of Finance (DOF) and the Bureau of Internal Revenue (BIR) with respect to the tax consequences of crypto-related transactions.

Be that as it may, the existing tax regime established general principles that apply even to new and emerging asset classes such as cryptocurrencies.

In the absence of official guidance from the DOF and the BIR, the revenue rulings and guidance issued by tax authorities in other jurisdictions, particularly the Internal Revenue Service (IRS) of the United States, could shed some light on how crypto-related transactions, specifically airdrops, might implicate taxation.[1] This is because the Philippine income tax regime is of American origin, adopted from the federal income tax system. Thus, judicial interpretations by American courts and the agency interpretation by the IRS on parallel tax rules have persuasive effect in the Philippines.[2]

In the Philippines as in the United States, cryptoassets should be treated as property (rather than as currency) for income tax purposes. General principles that apply to property are relevant and therefore should be considered in assessing the tax implications of airdrop-related transactions.[3] It would be improper to assess the tax consequences of a crypto transaction based on foreign currency rules, unless the tax law is updated to specifically provide otherwise.

Basic principles of income taxation

Under Section 32(A) of the National Internal Revenue Code,[4] “gross income” means all income derived from whatever source, including gains from dealings in property.[5] All gains or undeniable accessions to wealth, clearly realized, over which a taxpayer has complete dominion, are included in gross income.[6] In Commissioner of Internal Revenue v. Glenshaw Glass Co., it was held that when Congress enacted that “gains or profits and income derived from any source whatsoever,” it intended to tax all gains except those specifically exempted.[7]

Income may be received in the form of cash (or its equivalent), property (in kind), service, or a combination of the three. This means that new tokens airdropped to existing holders may be considered a taxable income in certain circumstances. It is necessary to consider specific facts and circumstances to determine whether income was realized from the transaction.[8] But as a general principle, income is realized when there is a gain or profit derived from a closed and completed transaction.[9]

Are airdrops subject to income tax?

Receipt of a new cryptoasset via airdrop, whether following a contentious hard fork or otherwise, could result in a taxable income to the recipient if the latter opted to exercise acts of dominion and control that would indicate an intent to own and possess the new asset. This view applies by analogy the tax principles implicated when someone immediately declines a prize, returns an unsolicited merchandise or free samples, or immediately returns a home run baseball after catching it.[10]

Airdrops should initially be treated as “unsolicited property,” and the mere receipt of it should not constitute income. The taxpayer has to “accept the property” by exercising acts of dominion and control, and possession per se does not automatically imply acceptance of the airdrop.

For tax purposes, a taxpayer did not receive cryptocurrency even when the airdrop is recorded on the blockchain if the taxpayer is incapable of exercising dominion and control over the cryptocurrency. For example, a taxpayer does not have dominion and control if the address to which the cryptocurrency is airdropped is contained in a wallet managed through a crypto exchange, and the crypto exchange does not yet support the newly-created cryptocurrency such that the airdropped cryptocurrency cannot be immediately credited to the taxpayer’s account at the crypto exchange. If the taxpayer later acquires the ability to transfer, sell, exchange, or otherwise dispose of the cryptocurrency, the taxpayer is deemed to have received the cryptocurrency at that later time.[11]

On the other hand, if the recipient decides to appropriate (e.g. spend, trade, transfer, stake, lend, etc.) the airdropped cryptocurrency, income tax will apply based on the fair market value of the cryptocurrency at the time of the airdrop.[12] An airdrop generally is received on the date and at the time it is recorded on the blockchain or distributed ledger.[13] Any subsequent increase in the value of the airdrop will be treated as an unrealized gain, which gain will be realized and subject to tax when the same is sold or disposed of (e.g., by trading it for another cryptocurrency).

Other tax considerations

For tax purposes, it is important to take into account the purpose of the token issuer in initiating an airdrop. For example, if the airdrop was intended to advertise or promote a particular project or token, the airdrop does not give rise to tax liability on the part of the token issuer. On the contrary, the airdrop can even be considered as a marketing expense, which may be treated as a deductible business expense assuming that all conditions for deductibility are present.

If the airdrop was purposeful or intentional—not accidental like those occurring during a chain-split, but the purpose of the airdrop seemed arbitrary or the motive was unclear other than to “give away” free tokens, it may be possible under certain circumstances that the airdrop may be characterized as a donation, which would expose the token issuer to donor’s tax liability. In this scenario, the recipient would be exempt from income tax pursuant to Section 32(B) of the National Internal Revenue Code, which excludes gifts from gross income. The plain meaning of the term “income” naturally excludes gifts or gratuities of any sort,[14] and tokens freely given away via airdrop—with no strings attached—should be excluded from the taxpayer’s gross income.

However, even in the latter case where the receipt of the airdropped token should be excluded from the gross income, any subsequent income from the airdropped token—such as staking rewards, yield, and trading gains—must be included in the gross income.[15] When it comes to the unrealized gain or “paper profits” due to the price appreciation of the token, the gain will be realized and reported as a taxable income only upon the sale, exchange, or disposition of the airdropped tokens.

This article is published on BitPinas: Tax Implications of Crypto Airdrops in the Philippines

  1. See for example U.S. IRS Notice 2014-21 (2014).

  2. Bañas v. Court of Appeals, G.R. No. 102967 (2000).

  3. See for example the U.S. IRS’ interpretation as early as 2014 per IRS Notice 2014-21.

  4. R.A. No. 8424, as amended (1997).

  5. Sec. 32(A)(3), R.A. No. 8424, as amended (1997).

  6. Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).

  7. 348 U.S. 426 (1955).

  8. See Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 108576 (1999).

  9. Fisher v. Trinidad, G.R. No. 17518 (1922).

  10. U.S. Internal Revenue Service, IR-98-56 (1998).

  11. U.S. Internal Revenue Service, Rev. Rul. 2019-24 (2019).

  12. When a taxpayer receives property that is not purchased, the taxpayer’s basis in the property received is determined by reference to the amount included in gross income, which is generally the fair market value of the property when it was received.

  13. According to the IRS, it might be possible for the taxpayer to constructively receive cryptocurrency before the airdrop is recorded on the blockchain. (U.S. Internal Revenue Service, Rev. Rul. 2019-24)

  14. Efren Vincent Dizon, Taxation Law Compendium, Vol. II, p. 561 (2015), citing Eisner v. Macomber, 252 U.S. 1889 (1920).

  15. Sec. 32(B), R.A. No. 8424, as amended.

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