The ATO’s draft tax guidance on crypto airdrops & wrapping

The Australian Taxation Office (ATO) has released Draft Taxation Ruling TR 2026/D1 and Draft Taxation Determination TD 2026/D2, setting out its preliminary views on the income tax treatment of crypto asset airdrops and the capital gains tax (CGT) consequences of wrapping and unwrapping crypto assets.

The draft guidance may affect crypto asset businesses, investors, and other Australian resident taxpayers. Importantly, wrapping or unwrapping a crypto asset may trigger a taxable event even where the taxpayer retains substantially equivalent economic exposure.

Airdrop arrangements

An airdrop generally involves an issuer distributing established or newly created crypto assets to a recipient. Airdrops may be used to reward the holder of another digital asset, promote a project, remunerate services, or distribute assets without the recipient’s prior knowledge.

TR 2026/D1 addresses the income tax consequences for Australian resident issuers and recipients. It does not apply where crypto assets are transferred in exchange for money or other crypto assets. The proposed treatment depends on the circumstances in which the airdrop occurs.

Crypto asset trading businesses

• Crypto assets held in the ordinary course of a crypto asset trading business may be trading stock.
• An issuer may be entitled to deduct expenditure incurred in providing an airdrop where the general deduction requirements are satisfied.
• A recipient may need to include the value of an airdropped crypto asset in assessable income.

Rewards, hobbies & other airdrops

Where a recipient receives crypto assets as a reward for services, promotional activity, or another income-producing activity, the market value of the assets when derived may be assessable as ordinary income. That value will also be relevant when determining the asset’s cost base or trading stock value for subsequent tax purposes.

An airdrop received in the course of a genuine hobby or recreational activity may not be ordinary income. However, the subsequent disposal of the asset may still have CGT consequences. Whether an activity is a business, income-producing activity, or a hobby depends on the particular facts.

Wrapping & unwrapping crypto assets

A wrapping contract is a smart contract that exchanges a crypto asset for a wrapped equivalent, usually so that it can operate on a particular protocol or platform that it would otherwise not be compatible with.

Under TD 2026/D2, the ATO’s preliminary view is that a taxpayer ceases to own the original crypto asset when it is transferred to the wrapping contract and instead receives a separate CGT asset in the form of the wrapped crypto asset. The ATO’s reasoning is as follows:

• CGT event C2 happens when the taxpayer’s ownership of the original crypto asset ends.
• The capital proceeds are generally the market value of the wrapped crypto asset received.
• The taxpayer compares those proceeds with the cost base of the original asset to calculate any capital gain or loss.
• Unwrapping may trigger a further CGT event when ownership of the wrapped asset ends and the original token is received.

This means wrapping and unwrapping may each create a tax liability despite the taxpayer maintaining broadly equivalent economic exposure before and after the transaction. The draft Determination applies only to the arrangements described in it. Other smart contracts and cross-chain arrangements may have different legal and tax consequences.

Alternative views

TD 2026/D2 acknowledges alternative views, including that the taxpayer may retain a continuing property interest in the original crypto asset or that another CGT event may be more appropriate. The ATO nevertheless concludes that CGT event C2 applies to the arrangements covered by the draft Determination and does not accept that the replacement-asset rollover in Subdivision 124-B is available merely because an economically equivalent wrapped asset is received.

The broader legal context — Poulton v Conrad

The characterisation of crypto assets under Australian property law is also before the High Court in Poulton v Conrad. The appeal was heard on 13 August 2026 and concerns whether Bitcoin can be the subject of a proprietary relationship and, if so, whether it is capable of possession for the purposes of the torts of conversion and detinue. Judgment remains reserved.

The appeal arose from Poulton v Conrad [2025] TASFC 7, in which the Full Court of the Supreme Court of Tasmania dismissed the appeal and endorsed the view that Bitcoin is intangible property capable of possession through control of the relevant private key. That reasoning contemplates a category of intangible property outside the traditional division between choses in possession and choses in action.

The High Court’s decision will not itself determine the income tax treatment of airdrops or wrapping arrangements. However, its analysis of the nature of a taxpayer’s proprietary interest in Bitcoin, and the significance of control through private keys, may be relevant to the legal assumptions underlying the ATO’s view that ownership of an original crypto asset ends when it is wrapped. This issue also goes to the heart of the ATOs position, outlined in TD 2014/26 that bitcoin is property at law and is a CGT asset.

Taxpayers should therefore monitor both the final ATO guidance and the High Court’s judgment.

What taxpayers should do

• Identify the legal and commercial terms of each transaction.
• Distinguish business, income-producing, and private or recreational activities.
• Record the date, quantity, and Australian dollar market value of assets received or disposed of.
• Retain wallet records, transaction hashes, smart contract details, and exchange data.
• Consider both ordinary income and CGT consequences.
• Review whether previous returns are consistent with the ATO’s draft views.
• Obtain advice before entering into significant or unusual arrangements.

How SW can help

SW can assist crypto asset businesses and investors in assessing the income tax and CGT consequences of airdrops, wrapping, and unwrapping, as well as determining whether activities amount to carrying on a business, reviewing valuation methods and transaction records, and identifying transactions that may have triggered previously unrecognised tax consequences.

We can also consider whether prior-year positions should be reviewed and prepare supporting analysis while the ATO guidance remains in draft.

Please contact your SW advisor if you would like to discuss how the draft guidance applies to your arrangements.

Contributors

Stephen Peries | Senior Manager, Tax