At first glance, crypto airdrops can very much feel like “free ”money”—tokens simply appear in your wallet without you having to lift a finger. But looks can be deceiving, and depending on how and when you receive these tokens, the IRS may come knocking at your door. In this guide, the team at Onchain Accounting, as your crypto bookkeeper, will break down what crypto airdrops are, how the IRS treats airdrops, and what every investor needs to know to avoid any unexpected surprises.
What are crypto airdrops?
A crypto airdrop is a strategic activity, typically performed by blockchain-based startups to help improve the presence and value of their virtual currency project. The main idea behind airdrops is to spread awareness about projects and encourage more individuals to participate and invest in the asset before or when it becomes widely available.
There are different types of crypto airdrops, each with its own goals and requirements. They include:
- Standard crypto airdrop—In these types of airdrops, the person must communicate their interest to participate and provide a valid wallet address.
- Bounty airdrop—A person is required to perform specific tasks that often involve raising awareness about the project. They will receive some assets once the tasks have been completed.
- Holder airdrop—To qualify for an airdrop, the person must hold a certain amount of existing coins or tokens for a certain duration.
- Exclusive airdrop—For these types of airdrops, the participants need to be selected or invited by the project team to receive the tokens. The individuals may be selected based on criteria such as reputation, influence, market expertise, contribution, etc.
Are crypto airdrops taxable?
Yes, crypto airdrops are subject to tax. The two main types of tax that can impact crypto airdrops are income tax and capital gains tax.
- Income tax—In certain situations, the IRS can consider your crypto airdrop as “other income.” This means that the crypto will be taxed at the progressive income tax rate, which can range from 10% to 37%. As other income, they should be reported in IRS Form 1040 Schedule 1.
- Capital gains tax—If you receive crypto via airdrop and you subsequently choose to sell, exchange, or dispose of the cryptocurrency, you will be taxed on any capital gains you have achieved through the transaction. The capital gains must be reported to the IRS through IRS Form 8949.
What are the steps that can be taken to ensure tax compliance?
As a crypto CPA, we recommended that investors take the following steps to ensure tax compliance and avoid any surprise IRS notices and tax bills.
- Track every airdrop from the beginning and note down important details such as date and time received, quantity of tokens, fair market value, wallet addresses, and token symbols.
- Use crypto tax software that detects airdrops
- Understand when and how airdrops become taxable events
- Separate the tokens you purchased from the ones you received from airdrops.
- Continuously monitor token values
- Record your cost basis for future capital gains/loss calculations.
- Avoid unsafe and suspicious airdrops.
- Stay updated on IRS airdrop guidelines.
- Work with a crypto CPA to handle complex tax filings.
Conclusion
Crypto airdrops can very much feel like “free money”, but if you’re not careful, you might find yourself facing unnecessary and unpleasant tax burdens you aren’t ready for. At Onchain Accounting, we’ve been helping investors navigate the complexities of crypto tax accounting for over 8 years. From tracking and valuing airdrops to proper reporting and tax planning, we make sure all your transactions are accurate, compliant, and strategically maintained. Take control of your crypto tax strategy with Onchain Accounting today.
