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  • A surprise Christmas present as SOS drops crypto airdrop

    28 December 2021

    Andy Wood

    All I want for Christmas is… SOS?!

    There was perhaps an unexpected Christmas present for NFT fans who have used the Opensea platform since its very first day.

    Open DAO, which is understood to be unconnected with Opensea, airdropped 50% of its SOS token supply to all addresses that have traded on the NFT platform.

    All that was required was for the user to claim the tokens via the Open DAO website. It is understood that these tokens were worth from a few hundred dollars to tens of thousands of dollars.

    Airdrops are usually used as a marketing tactic to build a crypto project or community. In many ways, this was a superb marketing play by Open DAO.

    Overview of the tax position

    But what is the position from a tax perspective?

    Generally speaking, the receipt of an airdrop will not be taxable. One exception might be where the airdrop is received in the capacity as a crypto trading business.

    However, firstly, we will need to make a note of the airdrop for the purposes of calculating the base cost of the tokens on a future disposal of the same type of coin.

    Crypto coins or tokens are usually be placed in separate ‘pools’. These are rather grandly referred to as s104 pools. This simply references the piece of legislation that dictates this manoeuvre.

    However, there is no magic here.

    The pool simply records the number of coins acquired and for what price.

    Where tokens are acquired in tranches at differing prices then if we sell all of the coins then we know that the base cost will be the total cost paid for that pool (or in crypto-speak, bag) of tokens.

    However, if we sell only part of the holding then we generally need to calculate the average price the coins were acquired for (ie the total purchase price divided by number of coins).

    For example, consider the position where an individual holds 5,000 TaxDogeCoins. She purchased these in tranches of 500, with the relevant acquisition costs being

    • £500,
    • £1,000,
    • £2,000; and
    • £1,500

    Here, the total cost of these 5,000 tokens would be £5,000 at an average of £1.00 per coin.

    If 1,000 coins are disposed of, then the allowable cost for capital gains tax will be 20% of the total. In this case, it will be £1,000.

    Exceptions to the pooling rule

    There are two major exceptions to the above:

    1. Tokens purchased on the same day as disposal (the ‘same day rule’)
    2. Tokens acquired in the 30 days following the day of disposal (known as the ‘bed and breakfasting)

    In both cases, where the same tokens are sold and repurchased either on the same day or within 30 days, then the full gain does not become taxable.

    Instead, the repurchase cost becomes the acquisition cost for the disposed of tokens and the gain/loss is calculated using this figure.

    When these same tokens are disposed of in future, the original acquisition cost will be used to calculate the gain, rather than the repurchase cost.

    It is common to avoid the bed and breakfast rules by repurchasing through either a pension scheme or through an ISA. Although far from being mainstream, I am aware of providers offering both a pension and ISA wrapper for cryptos.

    That’s great, but I want to know how my SOS taxed?

    In short, there is unlikely to be any tax to pay on the airdrop of the tokens to a recipient.

    The airdropped assets will need to be added to a new SOS s104 pool. Broadly, the cost of these tokens will be nil plus the usual gas fee for entering into the transaction.

    You will encounter a taxable event when you dispose of those tokens.

    However, it should be noted that a disposal does not only include converting SOS to cash but will also include the more likely exchange of SOS into ETH.

    So those who have paper-handed their SOS tokens and changed them into another crypto then they are likely to have chargeable gains of the value of the tokens converted into the new crypto less the gas fees on purchase and a proportion of the gas fees on the exchange into, say, ETH.

    Whether this is taxable will depend on the individual’s residence status, whether the crypto is held via any structure or wrapper and whether there are any reliefs or exemptions – such as the annual exemption for individuals – available.

    If you have any queries about this article, airdrops or crypto in general then please do get in touch.

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    Please provide as much detail as possible in regards to the reason for your enquiry so our tax advisers can prepare and tailor their response to reflect your needs. We will endeavour to - respond / call you back - to discuss your enquiry and you will not be charged for this time.

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