Airdrop Taxes: How to Report in 2024

When should I recognize income from an airdrop?

In some situations, it’s not clear when you should recognize income from an airdrop. Let’s explore a couple of common scenarios that may cause confusion. 

What if my airdrop rewards had no fair market value? 

In some cases, your airdrop rewards might not have a fair market value at the time you receive them because they are not yet being actively traded. If you find yourself in this situation, you can instead use the fair market value at the time a market does become readily available. 

What if I had to claim my airdrop rewards? 

In some cases, it may be difficult to tell when you ‘received’ your cryptocurrency and what fair market value you should use when calculating your income. 

For example, some airdrops require users to pay a gas fee to claim their rewards. The IRS has not given explicit guidance on whether crypto investors should recognize income at the time the airdrop becomes available or at the time the rewards are claimed. 

It’s likely that the IRS will require investors to recognize income when they have ‘dominion and control’ of their assets — in other words, when they can sell or trade their tokens freely. The moment when investors get ‘dominion and control’ may vary depending on the specific mechanisms of the airdrop. 

If you’re not sure when you should recognize your airdrop income on your taxes, you should reach out to your tax professional with details about your specific situation.

Does airdrop income get taxed twice? 

Just as you would report gain or loss on the sale or exchange of any token, you would also report the gain or loss on the sale or exchange of an airdropped token. You are not, however, taxed on the same income twice.

As mentioned earlier, airdrop rewards are taxed as ordinary income based on their fair market value at the time they are received. If a disposal occurs, you will only be required to incur capital gains or losses based on how the price of your tokens has changed since you originally received them. 

Here’s an example of how this works. 

How do I determine my cost basis for my airdrop? 

As shown in the example above, your cost basis going forward for your airdropped tokens is equal to the amount of income you picked up when claiming the airdrop on your taxes. You can calculate this by finding the fair market value of the tokens at the time of the airdrop. 

How are NFT airdrops taxed? 

While the IRS hasn’t given out clear guidance on NFT airdrops, it’s reasonable to assume that they’ll be taxed the same way as other crypto airdrops. You’ll likely recognize income based on the airdropped NFT’s value at the time of the airdrop or at the time a market becomes available. 

Common airdrop issues 

While airdrops can be a great way to reward crypto investors, they often come with their own tax-related issues. Here are three common ones. 

The price of my airdropped tokens has declined significantly 

Remember, you will be required to pay income taxes based on the fair market value of your tokens at the time they were airdropped to you. However, this may be an issue if the token’s price declines significantly. In this case, it’s possible that you may need to pay more money in taxes than you currently have available. 

To avoid this scenario, we recommend using a crypto tax software that can help you track your tax liability throughout the year. 

I received an airdrop I didn’t want 

Occasionally, projects may airdrop unsolicited tokens to crypto investors. 

In most cases, these tokens have very little value. If there is a fair market value attached to these tokens, you should report it on your tax return. Usually, this will only be a few dollars of income. 

I lost money in an airdrop scam 

Airdrops can be used to scam unsuspecting cryptocurrency investors. Some phony projects ask for investors’ private keys, then use this information to steal the assets contained within their wallets.

Unfortunately, these types of ‘casualty losses’ typically can’t be deducted from your tax return. 

If you’ve been the victim of an airdrop scam, check out our guide for how to report lost or stolen cryptocurrency on your tax return. 

How will the IRS know if I got an airdrop? 

Some investors choose not to report airdrop rewards, believing that the IRS will not be able to trace the transaction. 

However, not reporting airdrop rewards is a form of tax evasion and could come with severe consequences. 

The IRS employs the services of third-party companies such as Chainalysis to match anonymous wallets to investors. Not reporting your income increases the risk that you’ll face a cryptocurrency tax audit and possibly face jail time. 

File your crypto taxes in minutes 

With CoinLedger, reporting airdrops on your taxes is easier than ever. The platform allows you to report income from airdrops in minutes. 

In addition, you can automatically import transactions from exchanges such as Coinbase, Kraken, and Gemini. When tax season rolls around, you’ll be able to generate a complete crypto tax report in minutes. 

Get started with a free account today.