Are There Crypto Airdrop Taxes?

New platforms or NFT collections often use airdrops to attract or reward users. If you receive tokens in an airdrop, are they taxable? Find out more.

Andrew Perlin
ByAndrew Perlin, CPAUpdated on October 18, 2022 · minute read

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Key Takeaways

  • Funds received from an airdrop or hard fork are taxed as ordinary income.

  • This income is reported at the value of the asset when you took full control of it.

Are There Crypto Airdrop Taxes?

Airdrops are a common way for new platforms or NFT collections to reward early supporters, gain new users, and attract media attention. Essentially, an airdrop is a free distribution of tokens to a large number of wallets. For example, when Layer 2 scaling solution Optimism launches its governance token $OP, 264,079 wallet addresses will be able to claim tokens that make up 5% of OP’s initial supply.[1]

While recipients of the Optimism airdrop had the option of not claiming the tokens, not all airdrops come with choice. Some send investors tokens automatically, with no way for investors to reject the assets. This sets up a tricky tax situation, since investors may acquire tokens against their will.

How are airdrops taxed?

Although the IRS has been slow to roll out crypto tax guidance, it actually has addressed how to treat airdrops and hard forks. Its 2019 guidance clarifies that airdrops and hard forks are taxed as ordinary income, at the market value the asset had when you received and took full control of it. So, if you receive tokens from an airdrop—whether you wanted to or not—you must report them on your tax return. 

Airdrop income example

  • You received 50 KLIMA from the KlimaDAO airdrop.

  • If KLIMA was $2,000 when you received the airdrop, you would need to report $100,000 of income on your tax returns, regardless of the token's current price. 

When you do sell, swap, or trade an airdropped asset, you will report capital gains tax on any increase in its value from the time you received it to the time of its disposal. 

When are airdrops taxed?

The various mechanisms by which airdrops are distributed can make it difficult to tell when the taxable event actually occurred. Traditionally, you experience a taxable event when the asset is fully under your “dominion and control.”  However, this isn’t crystal clear in cryptocurrency. 

Does the taxable event occur when you claim an airdrop or when it is deposited in your wallet? The difference in dates can make a huge difference in the amount of income an investor has to report. We recommend speaking to a crypto tax accountant about when you should report receiving an airdrop. 

FAQs about crypto airdrop taxes

Do I have to report an airdrop I didn’t want? 

Unfortunately, according to the IRS’ current guidance, you will still need to report the asset as ordinary income at its value when it was received. 

What do I report if I was airdropped an asset that is now worthless? 

You need to realize a crypto loss in order to report it on your tax return. This can be very difficult for assets for which there is no longer a market. The best solution is to sell the asset for a nominal sum in an arm’s length transaction; however this is easier said than done. 

What do I report if the value of my airdropped token spiked and then plunged? 

After the announcement of a launch or airdrop, a token’s value might surge, only to immediately plummet. For example, holders of Bored Ape NFTs were eligible to claim airdropped tokens when the organization launched ApeCoin (APE). Initial excitement saw the coin’s price surge to $39.40, drop to around $6, recover to $17, only to ultimately settle at around $7. 

If you claim an airdrop while a token’s value is surging, you have to report your income as the asset’s fair market value when you took control of it. The token’s current value doesn’t matter for tax purposes. 

Airdrop income example

  • Cindy claimed 5,000 APE when it was trading at $30

  • She has to report $150,000 in ordinary income, even if that APE is currently worth $35,000.  

What can I do if I was the victim of an airdrop scam? 

Recently, there has been an uptick in airdrop phishing scams, often ones promising Bored Ape airdrops—but then requiring the user to enter secret passwords and phrases that are then used to steal funds. 

Unfortunately, if this happens to an individual taxpayer, there isn’t much you can do as far as your taxes go. After the Tax Cuts and Jobs Act of 2019, only losses from federally-recognized disasters are eligible as casualty losses.

To stay up to date on the latest, follow TokenTax on Twitter @tokentax.

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References

Last reviewed by Andrew Perlin, CPA on October 18, 2022 · Sources

Andrew Perlin
Andrew PerlinAccounting at TokenTax
Andrew Perlin is a CPA specializing in crypto taxes. After working as a financial controller, he co-founded CryptoCPAs, which was acquired by TokenTax in 2018.

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