Are Airdrops Taxable? How to Handle Your Crypto Taxes

Cryptocurrency airdrops, where digital tokens are distributed to wallet holders, are common. While these distributions may appear free, the Internal Revenue Service (IRS) generally considers them taxable events. Understanding the tax implications of receiving airdropped cryptocurrency is important.

Understanding Airdrops and Initial Income Taxation

Airdrops distribute new digital tokens, often for promotion or to reward existing token holders. Projects frequently use airdrops to generate awareness, build a community, or distribute governance tokens. The IRS considers these distributions taxable income because they increase your wealth.

A tax event occurs when you gain “dominion and control” over the airdropped tokens. This means you have the ability to freely transfer, sell, or exchange the assets. If tokens automatically appear in your digital wallet, dominion and control may be established at the moment of receipt. If claiming an airdrop requires action, such as interacting with a smart contract, the tax event occurs once you successfully claim them.

Airdrops are taxed as ordinary income, similar to wages or interest. Report the fair market value (FMV) of the tokens at the time you gain dominion and control. Determine FMV using data from reliable cryptocurrency exchanges or blockchain explorers. If the token’s price changes after receipt, your taxable income is based on its value at the moment you gained control.

Reporting Your Airdrop Income

Report the fair market value of airdropped tokens as income on your federal tax return. Airdrop income is reported on Form 1040, Schedule 1. You will list the fair market value of the tokens under the “Other Income” line on Schedule 1.

When completing Schedule 1, you can provide a brief description, such as “crypto airdrop,” next to the reported income amount. This ensures the airdrop’s value is recognized as ordinary income for the tax year received.

Subsequent Tax Events: Capital Gains and Losses

After an airdropped token is received and its fair market value recognized as ordinary income, it becomes a capital asset. A second taxable event occurs when you sell, trade, or dispose of these tokens. This transaction results in a capital gain or loss, depending on how the token’s value changed since receipt.

To calculate a capital gain or loss, you subtract your cost basis from the sales price. For airdropped tokens, your cost basis is the fair market value reported as ordinary income at receipt. For example, if you received an airdrop valued at $100 and later sold it for $150, your capital gain would be $50. Conversely, if you sold it for $70, you would realize a capital loss of $30.

Capital gains and losses are categorized as either short-term or long-term. If you held the airdropped tokens for one year or less before selling them, any gain or loss is considered short-term. If you held them for more than one year, it is considered long-term. Short-term capital gains are taxed at ordinary income rates; long-term gains often qualify for lower rates. Report these capital transactions on IRS Form 8949, which details each disposal event. Summarized totals from Form 8949 transfer to Schedule D to determine your overall capital gain or loss.

Essential Record-Keeping

Accurate record-keeping is fundamental for reporting cryptocurrency airdrops and managing tax implications. Maintaining records helps calculate initial income and subsequent capital gains or losses. This documentation also serves as evidence if the IRS has inquiries.

For each airdrop, you should:
Record the date and time of receipt when you gained dominion and control.
Document the fair market value of tokens at that moment, along with the total number received.
Retain information regarding the airdrop’s source or platform and any relevant wallet addresses.
For later sales or dispositions, keep records of the sale date, price, and any transaction fees.

Utilizing spreadsheets or specialized crypto tax software can help organize this information and simplify reporting.