An airdrop is when an individual receives an allocation of tokens or cryptocurrencies. Examples of airdrops may be marketing campaigns or involve tokens being provided automatically due to other tokens being held or where an individual has registered to become eligible to take part in the airdrop.
Under current guidance from the IRS, airdrops are considered like cryptocurrency received in a hard fork. As the IRS defines income as from “all sources,” the IRS considers cryptocurrencies received as part of an airdrop to be considered general income.
To illustrate this point, let’s use an example:
- Sean receives 1 Token A on 03/15/2018 as an airdrop. It has a Fair Market Value (FMV) of $10 so he pays ordinary income tax on $10, per current IRS guidance.
- Sean sells Token ABC for $11. The cost-basis is $10 - the FMV of the token when he received it on 03/15/2018. (Remember that cryptocurrency is considered property, and because it’s disposition causes a capital event, subjecting him to potential Capital Gains tax).
- His capital gains calculation is: 11 USD – 10 USD = 1 USD (gain).
It’s important to note that for airdrops and hard forks, the IRS classes new cryptocurrency as received when the transaction is recorded on the distributed ledger (provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency).
If there is a delay in the receipt of the cryptocurrency, for example, if your exchange does not yet support the airdropped currency, then a taxable event does not occur until you have full control over the coins. It’s important to note the day you gained control of these cryptocurrencies, as they may affect when you realize gains.