Airdrops from a business perspective: what are the advantages and what tax implications should be considered?

In the dynamic world of cryptocurrencies, there are numerous ways for companies to promote projects and build a dedicated community. These include airdrops, which are used to distribute tokens or coins to a broad mass of people for free.

We will show you how airdrops work in detail, what advantages they offer companies and which tax aspects need to be considered.

What are airdrops?

Tokens or coins are distributed to the community free of charge through airdrops. This is usually done to publicise a new project, draw attention to a new cryptocurrency or to promote the decentralisation of the token.

Airdrops are often used as a marketing strategy to generate interest in a new cryptocurrency project. By giving people free tokens, they are more likely to support the project and share it online.

Free tokens/coins are also distributed as a reward – to existing users of a project or participants in certain activities (e.g. for holding a certain cryptocurrency in their wallet). This also ultimately serves to motivate the recipients to spread information about the airdrop and thus increase the issuer’s profile.

Airdrop is often subject to conditions

Anyone with a valid wallet address can participate in an airdrop. However, the airdrops may be subject to different conditions of participation, e.g.:

  • the holding of a certain amount of a cryptocurrency
  • to follow or to share social media pages
  • to sign up for a newsletter

How can companies use airdrops and benefit from them?

By strategically using airdrops, companies can improve their market position, strengthen their community and promote long-term growth. Airdrops are a flexible tool that can be used at different stages of a project to achieve specific goals.

Airdrops, for example, are an effective marketing tool for increasing awareness of a company or a new product. By distributing free tokens, a company can attract the attention of potential users and increase its reach by linking the acquisition of the airdrops to the distribution in social media channels, for example.

This marketing strategy offers the advantage of taking up little time and costing little.

Airdrops also allow companies to quickly build a broad user base by distributing free tokens to potential customers or investors. This is particularly useful for start-ups or new projects that want to quickly reach a critical mass. A strong community is often an important factor for the long-term success of a project.

Airdrops can also help to increase the liquidity of a token by increasing the number of token holders and activity in the market. More holders often lead to more trading volume and more stable pricing.

What companies need to bear in mind with airdrops and taxes

As already described, airdrops are usually given away for free as part of a marketing campaign. However, the following question is crucial here:

Is the airdrop really free of charge, i.e. is no service in return actually expected?

It should be noted that the participants in an airdrop are usually not allowed to be completely inactive. The BMF has with its letter dated 10 May 2022 taken a position on this:

Only if the user does not have to take any action to get the token on his wallet address is the airdrop irrelevant for tax purposes. However, the mere depositing of user data, e.g. an email address, is an active action and thus constitutes a service in return. For the recipient, the airdrop must therefore be declared for tax purposes – as other income in accordance with § 22 No. 3 EstG (the exemption limit of 256 euros must be observed).

From a VAT perspective, the Federal Ministry of Finance has not yet provided any information. However, the basic statements in the letter regarding the income tax treatment can also be used as a basis for VAT. In most cases, it is necessary to check in each individual case whether the receipt of the airdrop is an exchange of services or is not subject to any conditions.

Airdrops in business assets

If the receipt of coins or tokens as part of an airdrop is operationally motivated, it constitutes an operating income that is linked to the current market price. This applies regardless of whether the airdrop is linked to an active action, i.e. a consideration, or not. Accordingly, a profit or loss is to be realised when the airdrop is sold.

However, there is also a need for clarification with regard to business assets, e.g. whether the airdrops are assigned to:

  • privileged business assets in accordance with §§ 13a, 13b of the German Inheritance and Gift or
  • the non-distributable and administrative assets.

In the first case, they would be tax-exempt; in the second, they would be taxable.

Conclusion on airdrops from a business perspective

Airdrops offer companies an effective way to generate attention for new cryptocurrency projects and strengthen the community. However, in addition to the potential advantages of increasing token liquidity and building a strong user base, the tax implications of airdrops must be taken into account. Since the BMF has not yet provided any information on airdrops with regard to VAT, the exact characteristics of the respective airdrop (keyword: power exchange) often have to be checked in individual cases.