Hodlers

7.3 Taxpayer reactions to airdrops

7.3.3 Hodlers

This raises the point, however, that given the proliferation of XRP-related airdrops,

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what was before just a spes comes closer to being a reasonable expectation. A taxpayer who continually seeks airdrops may begin to exhibit this quality of continuity. Nevertheless, it is a question of fact.

Ultimately in isolated cases a taxpayer’s claim that their intention towards the option rests on acquiring an income producing asset is more persuasive. If they subsequently decide to exercise the option with a view to selling the underlying at a profit, while it could be argued this signifies a change of intention the case law does not place any emphasis on the taxpayer’s intention at the time of sale.

A taxpayer may have a mixed intention in acquiring the option. The taxpayer presumably has a revenue intention unless a dominant capital intention is demonstrated. Per the case law,

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it is submitted that the

‘absolving dominant purpose’ would need to be determined with reference to how long the taxpayer held the asset in an income- generating arrangement, and how the proceeds from an eventual sale compare to the income generated. If the greater profitability was derived through the sale, it could be that the income generation was incidental, and vice versa. Further, if income does not rise commensurately with asset price, it may be inferred that a taxpayer is employing a similar decision-making framework as Nussbaum;

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the inherent profit in the asset is what motivates the sale.

The above discussion is predicated on the contention that the taxpayer

has, indeed, acquired an option, which directs the inquiry to the original

intention only. If this proposition is dismissed, the case law regarding a

change of intention, or mixed intention, would apply – the Rubicon test.

could possibly defend a claim of capital nature – see the Krugerrand cases.

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While true in the early stages, crypto assets no longer are plagued by negative carry, and may be used to generate income. An excellent example is Nexo. A fully regulated financial institution based in Switzerland with assets under management in excess of USD13 billion, Nexo pay to their depositors anything between six and eight per cent of value on crypto assets, and as much as 12 per cent on US-dollar stablecoins.

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Additionally, as discussed above, the latest iterations of the Blockchain technology invariably have means by which to apply one’s asset to produce income other than through dealing. For these reasons, or a justification based on use as a currency, hedge or store of value, the contention that a taxpayer could only realise a profit in a crypto asset airdrop by dealing with it as trading stock is significantly weaker than in the past. A capital intention is a very real possibility.

A distinction must be drawn in that an opportunist transacts deliberately to segregate and acquire an embedded option, whereas a hodler does not. They acquire the option by virtue of their investment, not by virtue of specific capital deployment. The case law concerning options would have difficulty finding application as it is predicated on a taxpayer having an intention to acquire an option, which is not the case for a long-term holder. It is asserted capital intention ought to be determined with reference to two inquiries in such cases.

If one returns to a fundamental understanding of capital, it is that which gives rise to income; fixed capital remains intact, whereas floating capital is consumed in use to be replenished with the profit. In the case of a loan of money, interest is the civil fruits of the capital, or similarly for a farm or property, generating natural fruits or rent. The uniting feature in all of these is that the taxpayer clearly uses fixed capital to generate the amount coming in, whereupon it is suggested that this case study would turn on whether a taxpayer can be said to have used his fixed capital.

233 Haupt op cit note 87.

234 www.nexo.io.

It is submitted that a taxpayer cannot readily be said to use their capital.

In the examples above, the taxpayer determines where and how to place their capital such that it results in an income stream. In juxtaposition to an opportunist, who specifically uses financial capital to further their objective with respect to the airdrop, the offer in the case of a hodler is external to their actions.

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The only import XRP holdings have in the matter is as a means by which the offeror determines eligibility, which distinguishes the two approaches: a hodler is eligible, whereas an opportunist makes themselves eligible.

The second grounds to determine intention is with reference to the Pick

‘n Pay case, ie revenue must be, ‘…designedly sought, and worked for.’

As noted, it is not the taxpayer who seeks out the airdrop right by their own design, but by the design of the offeror it is conferred on them. In this sense it is very much fortuitous, a happenstance to their holding of an asset.

In contrast, a similar argument as above could be put that with the frequency with which XRP holders are being airdropped crypto assets of newly launched projects, it may rise to a reasonable expectation. This brings into question whether a hodler on a prospective basis holds XRP as an income-producing asset through several channels, regular interest payments and irregular airdrop receipts. While this would tend to paint airdrops with the quality of income, it is suggested the element of fortuitousness and the inability of the taxpayer to influence that outcome is a strong hurdle to arriving at this conclusion.

This notwithstanding, nothing precludes the airdropped assets received under lucrative title to become part of the taxpayer’s trading stock. This would result in a deemed disposal as discussed in ch 7.4.1, supra, thereafter the sale of the asset would be revenue. The base cost of the asset received as a donation from a non-resident would equate to its market value.

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235 The greatest action taken by a hodler is simply to respond to an offer, ie exercise their option.

236 Paragraph 20(h)(vi) of sch 8 of the Act.

While it is conceded that the deliberate seeking of gratuitous dispositions for the purposes of resale would constitute a trade (notwithstanding the element of donation), it is asserted a long-term holder of XRP’s receipt of an airdrop would not rise to the level of activity envisioned in the Pick ‘n Pay in the majority of cases. Further, rejection of a gift would be so contrary to human nature, that acceptance should not amount to satisfying the Rubicon test.

The decisive question is suggested as being: does the taxpayer seek the fortuity, or does the fortuity find the taxpayer?

By way of a concluding remark, in cases where hodlers engage in a

scheme of the opportunist in such a way as to demonstrate a revenue

intention, such taxpayers are at risk to being regarded as having changed

their intention towards their long-term holdings. The argument being that

a taxpayer cannot be in two minds towards the same object unless they

have a co-existent intention. The loss of a capital designation on

holdings, as well as the potential liability from a deemed disposal in terms

of para 12 of sch 8 of the Act, is a dire result. Taxpayers ought to be

mindful of this.