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Are Cryptocurrency Airdrops Taxed?
If you have received any cryptocurrency from an airdrop, it means you also have to pay some taxes in most cases. In this article, we will explain the latest tax treatment of airdrops and how to report this on your tax return.
Tax rules for cryptocurrency airdrops can be different from country to country. In this guide, we will look at the tax rules from a US citizen perspective, but it can also be considered a general guidance since the taxation of airdrops is very similar in many countries. Always clarify any questions you have with the tax agency in your country.
What is an Airdrop?
Everybody loves free money, but sadly it rarely happens that money appears out of nowhere in the real world. However, if you have ever bought and owned a crypto asset, you might actually also have received some free tokens to your wallet or exchange account in the form of an airdrop.
These airdrops are not often of very significant value, but over time they might actually grow to become quite valuable if you continue to receive and hold onto them. In rare cases, single airdrops can actually be worth more than $1,000!
Airdrops are usually sent to your wallet when a company is launching its own native token as part of an initial coin offering (ICO). The main goal behind this is usually to increase awareness and attention from other cryptocurrency investors. It is therefore a publicity stunt in most cases, and quite often will you not be aware of this happening before you later realize that there are some new coins in your wallet.
Some examples of valueable airdrops from the last years are:
- 1000 Ontology (ONT) in January 2018: ATH value $12,000
- Stellar (XLM) was airdropped to all holders of Bitcoin (BTC) (still ongoing)
- BitTorrent (BTT) was airdropped to all holders of Tron (TRX) in 2019
- 400 Uniswap (UNI) in September 2019: ATH value $3,400
How Airdrops are Taxed
The IRS has previously published tax guidance for cryptocurrencies which did not specifically mention airdrops, but in 2019 they issued Rev. Rul. 2019-24 which goes into detail about the tax treatment for coins received as airdrops. The IRS says that you should pay ordinary income tax on any cryptocurrency from an airdrop, and the fair market value of the coins on the day you received them should be used as the basis for the taxable income. This means that airdrops are taxed in a similar way as cryptocurrency received from mining and staking.
Let’s look at an example to understand the tax implications better. Peter has been trading cryptocurrencies on Uniswap during the summer of 2020 and was therefore eligible for the Uniswap token airdrop (400 UNI) in September. Peter claimed the tokens on September 17th when UNI was trading at $2.27 per token. He then later sold all his tokens the next day when the price was $4.50 per token. Now, let’s see how much taxes Peter needs to pay and how he must report this on his tax return next year.
The fair market value of the coins received on the date of the receipt should be used as the basis for the taxable income. This means that Peter has a taxable income of 400 * $2.27 = $908. This income should be reported as Other income on line 21 of Form 1040 Schedule 1.
This amount also becomes the cost basis for his UNI holdings which was sold the day after. The total proceeds for selling 400 UNI tokens are then calculated as 400 * $4.50 = $1,800. Next, we find his capital gains to be $1,800 – $908 = $892, which should be reported on IRS Form 8949.
To learn more about how to calculate and report capital gains for cryptocurrencies, please refer to our detailed tax guide.
Cryptocurrency Tax Software
If you don’t want to track and account for all coins received from airdrops, you can use a cryptocurrency tax software like Coinpanda to do this automatically for you.
This tax solution has become very popular in a short time and is used by thousands of cryptocurrency investors to automatically keep track of all transactions. If you have received crypto from airdrops, simply tag these transactions and you are ready to generate the necessary tax documents in just a few minutes. The software can import transactions from all major exchanges like Binance and Coinbase automatically, or you can add transactions manually if you prefer.
You can sign up for a 100% free account, or first read more about how the software can help you with reporting your crypto taxes. Coinpanda supports more than 65 countries today including the US, Canada, Australia, UK, and almost all other European countries.
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