However, this may be an issue if the token’s price declines significantly. Remember, you will be required to pay income taxes based on the fair market value of your tokens at the time they were airdropped to you. The price of my airdropped tokens has declined significantly While airdrops can be a great way to reward crypto investors, they often come with their own tax-related issues. You’ll likely recognize income based on the airdropped NFT’s value at the time of the airdrop or at the time a market becomes available. While the IRS hasn’t given out clear guidance on NFT airdrops, it’s reasonable to assume that they’ll be taxed the same way as other crypto airdrops. You can calculate this by finding the fair market value of the tokens at the time of the airdrop. How do I determine my cost basis for my airdrop?Īs shown in the example above, your cost basis going forward for your airdropped tokens is equal to the amount of income you picked up when claiming the airdrop on your taxes. If a disposal occurs, you will only be required to incur capital gains or losses based on how the price of your tokens has changed since you originally received them. You are not, however, taxed on the same income twice.Īs mentioned earlier, airdrop rewards are taxed as ordinary income based on their fair market value at the time they are received. Just as you would report gain or loss on the sale or exchange of any token, you would also report the gain or loss on the sale or exchange of an airdropped token.
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If you’re not sure when you should recognize your airdrop income on your taxes, you should reach out to your tax professional with details about your specific situation. The moment when investors get ‘dominion and control’ may vary depending on the specific mechanisms of the airdrop. It’s likely that the IRS will require investors to recognize income when they have ‘dominion and control’ of their assets - in other words, when they can sell or trade their tokens freely. The IRS has not given explicit guidance on whether crypto investors should recognize income at the time the airdrop becomes available or at the time the rewards are claimed. In some cases, it may be difficult to tell when you ‘received’ your cryptocurrency and what fair market value you should use when calculating your income.įor example, some airdrops require users to pay a gas fee to claim their rewards. What if I had to claim my airdrop rewards? If you find yourself in this situation, you can instead use the fair market value at the time a market does become readily available. In some cases, your airdrop rewards might not have a fair market value at the time you receive them because they are not yet being actively traded. What if my airdrop rewards had no fair market value? Let’s explore a couple of common scenarios that may cause confusion. In some situations, it’s not clear when you should recognize income from an airdrop. When should I recognize income from an airdrop? In both scenarios, recipients of these airdrops reaped thousands of dollars of value. More recently, in November 2021, Ethereum Naming Service (ENS) airdropped the ENS governance token to all users who had previously purchased an ENS domain.
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In September 2020, the decentralized exchange Uniswap airdropped 400 free UNI tokens to early users.
Many successful cryptocurrency projects have leveraged airdrops. It’s seen as a way to build awareness for the project, reward early evangelists, and foster a burgeoning community. In an airdrop, cryptocurrency projects freely distribute tokens to early users and investors. In this guide, we’ll break down the IRS’s guidance on airdrop taxes (and share a couple of tips on avoiding airdrop-related tax issues). While it can be a great way to reward early adopters and true believers, it can also become a headache for investors filing their tax returns. In recent years, an increasing number of cryptocurrency projects have airdropped tokens to users. However, the rewards come with an associated tax liability. Receiving an airdrop can bring cryptocurrency users thousands of dollars of value in an instant.
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