Op-ed: Even free crypto is taxable

Crypto holders are always looking for airdrops or free crypto – but many don’t consider the associated tax obligations. If you are based in the US, there is no good news regarding airdrop taxes.

Airdrops have become an increasingly popular method for projects to distribute tokens to the public. These airdrops often involve the unsolicited delivery of free tokens to users’ digital wallets. Although receiving free tokens may seem like a windfall, it is important to understand the tax implications associated with them. In this article, we’ll explore the basics of airdrop taxes, the factors that affect taxation, and the steps you can take to stay in compliance with the IRS.

What are Airdrops?

Airdrops are a marketing strategy that cryptocurrency projects use to distribute new tokens to users. They involve sending tokens to the digital wallet of individuals who have met certain requirements, such as holding a certain cryptocurrency, participating in a project or promoting it on Twitter.

IRS Guidance on Airdrop Taxes

In 2019, the IRS issued a revenue ruling to clarify the tax treatment of cryptocurrency airdrops and forks. According to the guidance, the fair market value of tokens received through airdrops is considered taxable income. One of the common challenges is that it can be difficult for a fair market value to be assigned to an airdrop. If this is the case, the IRS recommends using a “reasonable method used consistently.”

It is worth speaking to an accountant who can guide you through this process if you are unsure of the fair market value. It is important to keep a detailed record of the airdrops you receive, including the date, number of tokens and FMV at the time of the airdrop. This information will be needed to accurately report your income and calculate your tax liability.

What about other “earnings” cryptos like Learn&Earn programs and DeFi dividends?

Although there has been no specific IRS guidance on Learn & Earn programs or DeFi, revenue-based rewards are generally treated as income at fair market value. DeFi protocols in particular can cause significant challenges in terms of taxation, mainly because record keeping can be difficult.

There are potentially more taxable transactions when engaging with DeFi platforms and engaging in lending, borrowing and trading activities. The tax implications for these platforms may even vary depending on the specific service used.

One thing to note is that the tax rules are different if you are running a real business rather than trading as an individual investor subject to capital gains tax. If you think your crypto activities are sophisticated enough to be a business, talk to a tax professional who can help you navigate these rules.

Comply with IRS regulations

To ensure you comply with IRS regulations, consider the following:

• Maintain detailed records using software: Keep track of all airdrops you receive, including date, number of tokens and their real market value.
• Consult a tax professional: If you are unsure about the tax treatment of airdrops or need help with reporting, it is best to consult a tax professional who is familiar with cryptocurrency taxation.

With just days left until the tax deadline for many countries, crypto holders should be aware of the tax implications associated with airdrops and other free tokens they may have acquired over the past year. It is also recommended to consult a tax professional familiar with cryptocurrency taxation for those unsure of the tax treatment of airdrops and other crypto income.