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Reporting Crypto Airdrop Taxes in 2023
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Crypto airdrops are subject to IRS rules. They are considered ordinary income and should be reported at their market value when received, even if the tokens were acquired involuntarily. Crypto airdrop tax on capital gains occurs when you sell, swap, or trade airdropped assets.
To report income from a crypto airdrop on your tax return, use IRS Form 1040 Schedule 1. List it as "Other income" on line 8 and determine the fair market value at the time of receipt. When disposing of airdropped crypto, use Form 8949 and Schedule D to report short- or long-term capital gains or losses.
What is an airdrop?
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.
While recipients of the Optimism airdrop had the option of not claiming the tokens, not all airdrops come with a 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?
The IRS has addressed how to treat crypto airdrop tax, in addition to hard forks. 2019 IRS guidance indicates airdrops and hard forks are taxed as ordinary income at the fair market value the asset had upon receipt when you took full control. This means that if you receive tokens from an airdrop (whether you want to or not), you need to report them on your tax returns.
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.
Gain or loss on sale or exchange of an airdropped token
When you finally 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. In short, crypto airdrop tax occurs upon receipt (as income) and upon disposal (as capital gains).
Where to report my crypto airdrop on my tax return
To report income from a crypto airdrop on your tax return, use IRS Form 1040 Schedule 1. Report it as "Other income" on line 8 and determine the airdrop's fair market value at the time of receipt. This value is usually based on the distributed ledger's record at that moment. If your wallet is managed by an exchange that doesn't support the new coin, the IRS doesn't consider you to have control until it's accessible in your wallet.
For selling, exchanging, or disposing of crypto received from an airdrop, use Form 8949 and Schedule D. Form 8949 details each transaction, including the airdrop date, fair market value (your cost basis), and sale details. Schedule D summarizes your capital gains and losses. Capital gains are taxable, with rates based on the holding duration. More than a year is a lower long-term rate, while a year or less is a short-term rate.
Recognizing income from a crypto airdrop
There is some nuance to recognizing income from a crypto airdrop, with corresponding crypto airdrop tax consequences. Briefly, if your airdrop rewards lack a clear fair market value upon receipt because they're not actively traded, you can use the value when a market does emerge.
Some airdrops involve claiming rewards, making it tricky to determine when you received them and their fair market value. The IRS hasn't provided precise guidance on when to recognize income in such cases. It's likely that income recognition occurs when you gain 'dominion and control' over your assets, typically when you can freely sell or trade your tokens. The timing of this varies based on the specific airdrop mechanics.
When in doubt, consult with a crypto tax professional for clarity around when and how to recognize income from crypto airdrops.
How are NFT airdrops taxed?
As with airdropped tokens, typically, when you receive an airdropped NFT as part of a marketing campaign, it's treated as ordinary income and subject to income upon receipt.
Furthermore, if you later sell NFTs received in the airdrop and realize a capital gain, it will be subject to short- or long-term capital gains taxes.
Have us help you calculate your airdrop taxes
Navigating the complexities of crypto taxes can feel daunting, but it doesn't have to be painful. At TokenTax, we offer more than just crypto tax calculation software: we are a comprehensive crypto tax accounting firm with a mission to simplify your crypto taxes every tax season.
With our powerful and user-friendly software, you can effortlessly integrate your data from exchanges, protocols, and wallets, ensuring your tax calculations for airdrops and all of your crypto transactions are accurate and up-to-date.
Whether you're a casual crypto enthusiast or a seasoned power trader, we have a range of plans designed to cater to your specific needs. From self-directed software for those who prefer a DIY approach to dedicated enterprise teams for comprehensive support, we have a solution.
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Challenges with crypto airdrops and taxes
Here are some common challenges with crypto airdrops, taxes, and crypto tax software.
A common hurdle in crypto tax reporting is missing data sources and historical records. Failure to link all wallets and exchanges can lead to inaccuracies in tax calculations. Even self-transfers, which are not taxable, must be tracked for precise classification.
Additionally, software may mislabel transactions, necessitating manual review. If you've been involved in crypto for several years and are reporting for the first time, comprehensive records dating back to your initial crypto activities are essential for calculating accurate gains or losses.
Not all airdrops are legitimate, and spam or phishing attempts are common. Tax software may struggle to distinguish between genuine and questionable airdrops, potentially resulting in inflated income reports. Manually ignoring such transactions can be cumbersome, especially if dealing with numerous honeypot airdrops, requiring expert assistance.
Despite some IRS guidance on cryptocurrency taxation, numerous unanswered questions persist. Certain transactions, like token wrapping, offer multiple tax positions, making careful decision-making essential. Unique scenarios, such as crypto loss on a bankrupt exchange, may demand individual analysis
Complexity of NFTs and DeFi
NFTs and DeFi transactions introduce significant complexity, often overwhelming software's ability to classify them accurately. For instance, one DeFi transaction can generate over a hundred individual entries in the software. Correcting these errors frequently requires manual review.
TokenTax solves each of these issues with industry-leading software backed by a team of crypto tax professionals.
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
Here are answers to frequently asked questions about airdrop crypto tax and how to manage these in your annual tax filing.
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.
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 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 2018, only losses from federally-recognized disasters are eligible as casualty losses.
How will the IRS know if I got an airdrop?
It’s best to assume the IRS has full transparency into your crypto activities. Everything on the blockchain is accessible, and the IRS works with centralized exchanges and other third parties to track crypto activity.
How do I report airdrop crypto on TurboTax?
While TurboTax does provide a mechanism for reporting income from crypto activities such as mining, staking, or airdrops, users may need to manually input this information into the 'Miscellaneous Income' section of the software. Note that TokenTax integrates with TurboTax and can simplify the crypto tax reporting process.
Do you have to pay taxes on airdrops?
US taxpayers must pay taxes on airdrops upon receipt as income, and upon disposal as capital gains. Taxpayers outside the US can refer to our helpful international crypto tax guides for further direction.
How are airdrops taxed in other countries?
Airdrop crypto tax varies from country to country. In the UK and Australia, airdrops are subject to both income tax and capital gains tax. In Canada, airdrops are subject to capital gains tax. In contrast, in Germany, airdrops are not classified as income and are exempt from taxation. Consider our international crypto tax guides for more information.
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Last reviewed by Zac McClure,MBA on September 19, 2023 · Sources