Crypto Airdrop Taxes in 2023 Explained

Freddy King

Written by Freddy King, Reviewed by David Canedo, CPA

May 11, 2023

Crypto airdrops have become increasingly popular in recent years, but how are these rewards taxed? In this comprehensive guide to crypto airdrop taxes, our tax experts explain the best practices for reporting airdrops on your tax return and discuss future developments that may impact their tax treatment.

Last Updated: May 11, 2023

What are Crypto Airdrops?

Crypto airdrops are cryptocurrency transactions that deposit a coin or token directly into your wallet at no cost. Companies and projects in the crypto space often use them as a marketing strategy to distribute free tokens or coins to the wallets of eligible recipients. In turn, airdrop recipients usually need to perform certain actions or meet specific criteria to qualify for the airdrop.

There are many types of airdrops, and the criteria for participation can vary widely. For example, some airdrops may require participants to hold a certain amount of a particular token, while others may require participants to complete certain tasks or participate in community activities. Companies also restrict some airdrops to participants from certain geographic regions or jurisdictions.

Crypto airdrops can be a way for companies and projects to build community, incentivize adoption, and increase awareness of their offerings. Recipients of airdrops can also benefit from the potential value appreciation of the tokens or coins they receive.

It’s important to note that not all airdrops are legitimate, and some may be associated with scams, fraud, or phishing attacks. As with any investment opportunity, it’s important to do your research and exercise caution when participating in airdrops.

Airdrop Risks and Considerations

While crypto airdrops can offer potential benefits, there are also several risks and considerations to consider when taking part in them. Some of the key risks and considerations include:

Scams and Fraud: Airdrops are a popular target for scammers and fraudsters. It’s important to be cautious and avoid participating in any airdrops that seem too good to be true or require you to provide sensitive personal information.

Tax Implications: It’s important to consider the potential tax implications of participating in airdrops and to seek professional tax advice if necessary.

Investment Risks: Airdrops are not a guaranteed investment opportunity, and the tokens or coins received may not increase in value. It’s important to consider the potential risks and benefits of participating in airdrops and only invest what you can afford to lose.

Token Liquidity: Even if you receive tokens or coins from an airdrop, it may be difficult to sell them or convert them to other currencies or assets. It’s important to consider the liquidity of any tokens or coins received from an airdrop.

Regulation and Legal Risks: The regulatory landscape for cryptocurrencies and airdrops constantly evolves and can vary widely by jurisdiction. It’s important to stay informed about your jurisdiction’s relevant laws and regulations and comply with any applicable requirements.

In summary, while crypto airdrops can offer potential benefits, it’s important to consider the potential risks and considerations before participating in them carefully. It’s important to exercise caution, seek professional advice when necessary, and stay informed about the regulatory landscape.

Are Airdrops Taxable in the USA?

The tax treatment of crypto airdrops can be complex, and it’s important for taxpayers to understand the tax implications of receiving airdropped tokens for cryptocurrency tax purposes. Airdrops can trigger a taxable event, and taxpayers may be required to pay taxes on the fair market value of the airdropped tokens at the time of receipt.

The IRS has provided some guidance on the tax treatment of virtual currency transactions, including airdrops. According to the IRS, airdropped tokens are generally treated as ordinary income for tax purposes. The taxpayer must include the fair market value of the crypto assets at the time of receipt in their taxable income.

How are Crypto Airdrops Taxed?

If the taxpayer sells the airdropped tokens, the sale may trigger a capital gain or loss, which is calculated based on the difference between the cryptocurrency’s fair market value at the time of receipt and the time of sale. Note that there is never any double taxation on an asset. The taxpayer is taxed on the value of the assets received at the time of receipt and the amount of change in the value of the assets when they are sold.

The tax rate charged upon selling your assets depends on how long the assets have been held. Taxpayers who hold the crypto assets for more than one year before selling may be eligible for long-term capital gains treatment, which has a lower tax rate than short-term capital gains.

In summary, receiving a crypto airdrop will trigger a taxable event for crypto investors. Taxpayers may be required to pay taxes on the fair market value of the airdropped tokens as ordinary income. It’s important for taxpayers to consult with a tax professional or CPA to understand the tax implications and ensure compliance with relevant tax laws and regulations.

How to Report Crypto Airdrop on Taxes?

The IRS treats airdropped tokens as ordinary income at the time of receipt. This means that you must include the fair market value of the airdropped tokens in your taxable income for the year in which you received them.

If you sold the airdropped tokens within one year of receipt, the IRS also taxes any gains or losses on the sale as ordinary income. The short-term tax rate for gains on airdropped tokens is the same as the ordinary income tax rate and ranges from 10% to 37%.

You may be eligible for long-term capital gains treatment if you hold the airdropped tokens for over a year before selling them. This has a lower tax rate than short-term capital gains. Long-term capital gains tax rates can range from 0% to 20%, depending on your income level and filing status.

Besides federal taxes, you may also be required to pay state and local taxes on their crypto airdrops, depending on your state of residence and local tax laws.

You must keep accurate records for your crypto airdrops and report this information on your tax returns. Failing to report airdropped tokens as taxable income can cause penalties and may trigger an audit by the IRS.

For a detailed break down of crypto taxes in the US, check out Accointing’s regularly updated Crypto Tax Guide written by our tax experts.

Crypto Airdrop Taxes Best Practices

Tax experts recommend using crypto tax software to report your crypto airdrops accurately on your tax return. Our platform makes it easy for you to import all your crypto transactions, including airdrops, and create comprehensive tax reports in just a few 20

Using our platform allows you to avoid errors and save time while generating tax reports. You can also access detailed insights into your crypto portfolio, such as gains and losses, cost basis, etc. Our customer support team is always available to provide guidance and answer your questions.

In addition, our tax loss harvesting tools can help you determine the holding period of your crypto assets and optimize your tax outcome. By carefully analyzing your crypto portfolio, we can help you lower your overall tax liability and ensure that you’re taking advantage of all available tax deductions.

Overall, using our platform for reporting your crypto airdrops is an effective and efficient way to manage your taxes. It simplifies generating tax reports, provides valuable insights into your portfolio, and offers tax loss harvesting tools to help lower your overall tax liability.

Main Takeaways

Crypto airdrops can be rewarding but require careful consideration of tax implications. Keeping accurate records and using the right crypto tax tool can simplify reporting your crypto airdrops.

Accointing’s comprehensive crypto tax software is helping thousands around the world to stay compliant and save on their crypto taxes.