ATO to issue new guidance on wrapping and airdrops
The Australian Taxation Office has released draft rulings on airdrops and on the smart contracts used to wrap and unwrap tokens. These two instruments remain in draft form and subject to finalisation. The built upon existing web guidance but, if implemented, will bind the Commissioner and, by extension, taxpayers.
The timing of these draft rulings is curious given a major threshold question on the legal recognition of bitcoin as property remains pending before the High Court. The ATO has intervened in that case to support its existing position on the taxation of capital gains on cryptocurrency investments. The draft rulings risk pre-empting the High Court’s ruling.
While the proposed ruling on airdrops is sensible, the draft ruling on wrapping would operate as a significant disincentive to engage in common decentralised finance transactions where adverse tax consequences may occur.
Airdrops: ATO to focus on context of the receipt
Draft Taxation Ruling TR 2026/D1 addresses the income tax consequences for Australian resident issuers and recipients of airdropped crypto assets. Generally speaking, projects use airdrops to reward early supporters, promote platforms or compensate people for simple tasks, whilst some airdrops arrive without the holder asking for them. The ATO's proposed treatment depends primarily on why the tokens were received and the recipient’s activities.
For a crypto trading business (including individuals operating a crypto trading business), an airdrop’s market value would be ordinary income even if the tokens were unsolicited or arrived as a windfall. Tokens received for goods or services would be treated similarly. A non-business investor receiving an unsolicited airdrop, gift or holder reward on capital account would generally face no ordinary income tax on receipt, although the token would remain a separate capital gains tax (CGT) asset and its later disposal could trigger CGT event A1 (disposal of a CGT asset). Genuine hobby or entertainment rewards would generally fall outside assessable income, with related expenses remaining non-deductible.
For issuers, distributing tokens can trigger CGT event A1, although gains or losses on trading stock are disregarded under the CGT rules. The draft also addresses deductible distribution costs, market value and cost base, making the token’s value when it first reaches a wallet an important record.
Wrapping: a technical step with an unfortunate tax consequence
Draft Taxation Determination TD 2026/D2 deals with smart contracts that lock a crypto asset and mint its wrapped equivalent, often so it can be used with a different protocol or DeFi application. ETH and WETH provide the familiar example: despite moving together in value and being exchanged one for one, the ATO treats them as separate CGT assets - a view that many regard as overly technical and non-commercial.
On the ATO’s preliminary view, CGT event C2 occurs when the original token is sent to the wrapping contract because the owner abandons, surrenders or releases it. Another CGT event C2 occurs when the wrapped token is burnt on unwrapping. Capital proceeds are generally the market value of the token received, which also sets the new token’s cost base. A user may therefore crystallise a gain or loss during a technical step undertaken to access DeFi, without selling for cash. The draft offers no replacement asset rollover relief.
The remaining window for comment
The wrapping consultation has closed, leaving the airdrops ruling as the live opportunity for industry input. Comments on TR 2026/D1 are due by 16 October 2026 and may be sent to CryptoPagComments@ato.gov.au. Crypto businesses, investors and advisers concerned about valuation, unsolicited receipts or the boundary between business and capital treatment now have only a short period to respond.
Written by Steven Pettigrove and Luke Higgins
