Airdrop Taxes 101: Guide to Crypto Airdrop Taxes

Crypto Airdrop

If you are into crypto, you must’ve heard about airdrops. It’s a popular promotion tactic used by crypto businesses. But are airdrops taxable? This post explains airdrop taxes and other relevant, essential information. So, whether you’re a crypto enthusiast or a pro, you will find this post helpful. Let’s dig in!

What is an Airdrop?

An airdrop is the free distribution of cryptocurrency coins or tokens to several wallet addresses. It’s basically free money! cryptocurrency traders adore airdrops, especially when the value of the newly introduced coin or token rises.

Concerns regarding their security or safety are common among investors. Like other forms of cryptocurrency fraud, airdrop scams may exist. But for the most part, airdrops are secure, primarily when associated with reliable exchanges.

Why do Cryptocurrency Start-ups Use Airdrops?

Cryptocurrency start-ups use airdrops for a variety of reasons. They are usually a part of a marketing campaign. The following are some frequent uses of airdrops:

  • To decentralize token distribution.
  • To study investors.
  • To spread the word about a new coin or token.
  • To increase trading, which can help a new coin or token gain value.
  • To reward investors for finishing an activity, such as sharing an online article.
  • To pay off early investors and draw in new ones.

How are Airdrops Taxed?

According to IRS (Internal Revenue Service) advice, new bitcoin units obtained through airdrops after a hard fork should be subject to income tax.

Tax specialists generally agree that airdropped cryptocurrency incentives should be classified as ordinary income based on the fair market value at the time of receipt. And they should be taxed according to the individual’s tax bracket.

Investors in cryptocurrencies like you are accustomed to only disclosing taxes when there is a disposal, such as a sell or a swap. However, airdrops must be reported as income even in the absence of a disposal event. This might be confusing for you.

To clarify how to report crypto airdrops on taxes, the IRS has provided the following guidance.

crypto airdrop taxes

  • Income Tax

    You must pay income tax on each coin or token you receive as part of an airdrop. The IRS views them as a kind of income. Calculate your revenue by using the fair market value (FMV) of the coins on the day you got them. This should be noted on Form 1040 Schedule 1 as “other income.”

  • Capital Gains Tax

    You will be required to pay capital gains tax if you sell coins received through an airdrop. You can calculate your cost basis through pre-determined formulas. Then Remove it from the price you received when selling them to determine your capital gains. Form 8949 is used to report this.

What Taxes Apply to NFT Airdrops?

This is a topic which is not yet explicitly addressed by the IRS. However, it is logical to expect NFT airdrops to be taxed similarly to other crypto airdrops. You’ll probably get paid based on the worth of the airdropped NFT at the moment of the airdrop or when a market opens up.

Are There Any Tax-related Issues Which You May Face With Airdrops?

Airdrop tax has the scope to be more simplified. There are some frequent tax-related complications which users face with airdrops. The 3 most common issues are as follows:-

  1. Loss Due to Scams

    It is possible to con unwary bitcoin investors with airdrops. Some fraudulent projects request private keys from investors. Then use this information to take the money from their wallets. Unfortunately, you may usually not write off these “casualty losses” on your tax return.

  2. Unsolicited Airdrop Tokens

    Projects occasionally airdrop uninvited tokens to cryptocurrency investors. These tokens typically have extremely little value. However, you are obligated to include the fair market value of these tokens in your tax return. Typically, this will be a small amount of money.

  3. Significant Decline in the Price

    Your income tax obligations are determined by the fair market value of your tokens as of the airdrop date. This could become a problem if the token’s value falls sharply. You’ll need to pay more airdrop crypto tax in this situation than you have on hand.

Is There Any Simpler Way to File Crypto Tax?

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