Tax Implications of Crypto Airdrops

crypto airdrop tax

Airdrops are free coins that you may receive in your wallets by a current blockchain network or any Initial Coin Offering or ICO issuers. Many companies use these coins for the purpose of publicity or marketing a particular project and aim to boost awareness to people to know about their tokens. With that, those who receive these coins in their wallets will incur corresponding crypto airdrop taxes.  

Moreover, the crypto airdrop became popular when the ICO craze occurred a few years ago. Many people across the globe get interested in receiving airdrops from doing some tasks online and when they become a new user of a particular crypto project. Up until today, many people are still using these virtual coins for various practical purposes. Hence, to know more about crypto airdrop and its tax implications, read the complete details below. 

Are Crypto Airdrops Taxable?

The IRS had made it clear with everyone when they released a memo on the 28th of August in 2020. It aims to clarify that the Cryptocurrency airdrops earned from doing microtasks are all considered a taxable event and your ordinary income. In addition, according to the IRS, Rev. Rul. 2019-24, whatever property you receive that you didn’t purchase, the income taxes you owe will depend on the fair market value of that property the moment you receive it. The same thing goes when your wallet accumulates Cryptocurrency airdrops from every microtask you’ve completed. 

Microtasking works almost the same way as crowdsourcing. A large job creates smaller tasks and projects to designate for different individuals and complete them online. Some companies offer microtasks on the internet for a convertible airdrop as payment or compensation. It’s when the Cryptocurrency coins or tokens will be directly transferred to your particular wallet address. The amount can be too small from doing microtasks, but it’s still compensation that you have to include in your return. 

Moreover, if you receive the airdrops in your wallet without completing any microtasks, there’s an option to make it taxable as a royalty instead of incurring taxes as an earned income from any employment or job according to the said memo that the IRS released to the public. Besides that, if you receive Cryptocurrencies via airdrop, like Bitcoin, you can easily convert it to US dollars and other fiat values, so you can use and spend it anytime you want. 

However, since some airdrops are in the form of coins or tokens, their exact fair market value cannot be determined. Besides that, you can’t also convert them to US dollars and even to other fiat values available. So the only way to get the true fair market value of these new coins or tokens is to convert them to other Cryptocurrencies, like bitcoin. Therefore, once done, you can now convert them again to a particular fiat value or have them converted to US dollars. 

How is Tax Calculated on CryptoCurrency Airdrops?

According to the Cryptocurrency tax guidelines of the IRS, every time you receive a new coin in your wallet through an airdrop, you will be taxed for it as your ordinary income. The particular amount of that taxable income will depend on the fair market value of the coins on the day you’ve received them. 

For example, if you have an existing 2,500 Ripple on Coinbase and you’ve recently received another 2,500 Spark tokens via airdrop, you have to report the new tokens as your taxable and ordinary income. Even if you dispose of your tokens or not, it’s your ordinary income and not your capital gains. Then, the amount of the crypto taxes airdrop you owe will depend on the fair market value of the Spark the moment you’ve received it in your wallet. 

Hence, if its fair market value at that time is $3, it means you have to pay your tax from your total taxable income amounting to $7,500. Besides that, you also have to use the same amount as your basis to calculate your capital losses or capital gains whenever you decide to sell your Spark. 

crypto airdrop taxation
Generally, all crypto airdrops and forks should be reported on your tax return.

How to Report Crypto Airdrops on Taxes?

When you report your crypto airdrops on taxes, you have to know the total asset value you’ve airdropped during the tax year. If the total value is below $600, you don’t need to submit Form 1099 when filing your return. However, if it exceeds $600, those companies performing the crypto airdrops will have another form to fill out, and that is Form 1099-NEC. 

These companies will give you this form if the total Cryptocurrency airdrops you’ve received is more than $600 during the tax year, and it’s for your nonemployee compensation. But, if it’s a royalty payment, you’ll then receive the Form 1099-MISC from your issuing third party. Besides that, if you’ll be paying the corresponding income taxes for the crypto airdrops you receive, it means that it’ll be deductible to your issuing company. 

Hence, when you’re reporting crypto airdrops on your income taxes, besides the forms mentioned above, these are a few you have to fill out from the IRS. You may need Form 8949 for your sales and other records of your disposed capital assets. Schedule 1 will allow you to include all your additional ordinary income and even the adjustments to your taxable income. Besides that, you also have to include all capital gains and capital losses during the entire tax year on Form 1040, Schedule D. Then, there’s another form you have to submit, which is Form 1040: Individual Income Tax Return. 

Forgot to Report Crypto Airdrop?

forgot to report airdrop
Even if you forgot to report airdrops, you can still amend your tax return.

If you hadn’t reported your crypto airdrops when you filed your return, you may get tax advice from an experienced tax professional who has a complete understanding of how cryptocurrency works. You’ll surely get the assistance you need in tracking all of your crypto transactions and help you avoid the IRS crypto audit. Besides that, you can also submit amended tax returns to apply any changes or corrections to the previous return you’ve recently filed. Doing so will allow you to include your owed taxes from your crypto airdrop transactions. 

However, if it has been a couple of years that you haven’t reported your crypto airdrops, one available option you have is to use the Voluntary Disclosure Program. It’s a particular program that provides taxpayers with opportunities to clean their records in the IRS and avoid any criminal charges by paying their late and amended tax obligations with corresponding penalties. Hence, when you talk to a tax professional, you’ll get tax advice that you need to know the necessary steps you have to take that will help you deal with all of your tax obligations. 

FAQs

How do I report cryptocurrency on airdrop on my taxes?

If you want to report your crypto airdrops on your taxes, you have to know the total value of the airdrop assets you’ve received. When the total value of the asset you’ve airdropped in the entire tax year has exceeded $600, and it’s for your non-employee compensation, you will receive Form 1099-NEC from your issuing company. But, it’ll be Form 1099-MISC when the airdrops you received are a royalty payment. 

Besides that, if you’ve sold a Cryptocurrency airdrop, you’ll need Form 8949 to put down all of your sales records. You also have to fill out Form 1040, Schedule D, to include all of your capital losses and capital gains. On top of that, Schedule 1 is what you need if you have additional sources of income and other adjustments in your taxable income. Then, don’t forget to file Form 1040: Individual Income Tax Return. 

Is a hard fork taxable? 

According to the IRS, if you receive an airdrop of a new Cryptocurrency following a hard fork is tax exempt when the new crypto asset you received doesn’t have any units. However, the hard fork of crypto you own will incur a crypto airdrop tax when you can transfer funds or gain control and dominion over the crypto asset you have. 

Conclusion

Since airdrop is usually for marketing and promoting a particular project, you may find them easily online. Besides that, you can even search for different websites on the internet that will offer you free new coins sent to your wallet. However, scams and other fraudulent activities are also happening in the crypto world. That’s why you need to be extra careful to make your information secure at all times. 

It’s your sole responsibility as a crypto investor. Hence, always be safe on your online crypto transactions while you still enjoy seeing your assets growing and profit increasing. Besides that, don’t forget about crypto airdrop taxation that you need to include in your yearly tax return. Therefore, make sure to process and file your return on time while declaring all of the crypto transactions you did in the entire tax year. 

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