For early-stage adopters, crypto airdrops have become a trending marketing strategy. Despite being received for free, these airdropped tokens are taxable. In this article, you will find further details about how and why these tokens are taxed. Before digging any further, we have a beginner article titled “What is an airdrop?,” and collection of “top crypto confirmed/likely airdrops “and another one on “how to farm them.” These should give you the basics. Now, let’s move into the tax side of crypto airdrops. Let’s begin.
How Airdropped Tokens are Taxed?
According to the IRS, airdropped tokens are considered as ordinary income at the FMV (Fair Market Value) of the token on the day you can access (receive) it. Moreover, airdrop token are not considered as capital gains but a direct income.
- Receiving airdrop: The determined FMV (Fair Market Value) of the token at the date and time of first transfer is called other income by IRS.
- Selling airdrops: The reported FMV becomes the token’s cost basis. When this token is sold or exchanged, the difference in prices is reported as a capital gain or loss.
Why Do Governments Tax Crypto Airdrops?
If you receive a free asset with market value, tax authorities treat it as income. Assuming you receive an $ARB airdrop, Arbitrum is currently trading at $0.2008, which is market value. Your tax authority, such as the Internal Revenue Service for US residents, believes it is taxable. so, governments think like this: “If it has market value, it is taxable.”
Two Types of Airdrops and How They Are Taxed
Now, both types of airdrops are taxable. The difference is in how you receive them; it changes the math.
- Direct-to-Wallet Airdrops : These airdrops pop up in your wallet automatically, you do not have to pay any gas fees on them. You are taxed immediately at the current market value of the asset Let’s say project ASH directly sends you $200 worth of their $ASH tokens, each valued at $0.50. You report $100 on taxable income.
- Claim-Based Airdrop : Now, this airdrop involves you paying gas, and it is the most common method (JUP, and STRK.) You simply visit the claim site, connect your wallet and pay the gas fee.
What Happens When You Later Sell Your Airdropped Tokens?
There are two tax moments in crypto airdrops:
- Taxed as income at the point of receiving or claiming the airdrop. We covered this earlier. Let’s move to then next
- Taxed when you sell the token: This sort of tax is known as capital gains tax. For example, if you claim 400 tokens worth $200 on day one, and you later sell them for $650:
- Income tax (day of claim): $200
- Capital gains tax : $450
In some countries, you pay less if you sell at a loss.
Country by Country Airdrop Tax Policy
Let’s break it down so you know exactly what to expect.
USA
As per the Internal Revenue Service (IRS) of United States, airdrop tokens are taxable as income when you receive the airdrop. Which includes the fair market value of all tokens in your form 1040. Tax rate depends on your income bracket for the year. For example: You get 100 tokens worth $2 each. $200 is your taxable income for the year.
Canada
As per the Canada Revenue Agency (CRA), Canada, you are not taxed when you receive airdrops. Capital gains only applies when you sell, swap or get rid of the token , Only a 50% of capital gains are taxable. For example, If you receive $500 worth of tokens, you are not taxed yet. Sell later for $800, only $300 counts for capital gains tax, and only 50% of that is taxable.
European Union:
Airdrop, mining and staking counts as taxable income Tax rate varies across the country.
Australia
As per Australian Taxation Office (ATO), Australia, airdrops are taxed as income at the fair market value when received. And Capital gains apply when you sell your token. You must declare airdrops in the financial year you receive them.
United Kingdom
Airdrops are taxable at the point of receipt as per HMRC in the United Kingdom. While Capital gains tax applies when you dispose of the token. HMRC also requires users to report crypto assets for proper tax calculation.
How to Track Airdrops for Tax Purposes?
Tax can be scary if you don’t know how to track it. Here are the key things to note for proper documentation of your tax
- Date when you received or claimed the airdrop: The exact date is important because that is when the IRS or your local tax office considers the airdrop as income. Make sure to record it as soon as you get it in your wallet.
- Token price at the time of record : Check the market price of the token on the date you receive it because that’s the value that decides your income tax
- The number of tokens received : Keep an accurate record of how many tokens you received, as even small amounts accumulate over time, and accurate counts make reporting easier.
- Gas fees : If you paid any gas fees to claim the airdrop, keep track of them because, in some jurisdictions, gas fees can be deducted from your taxable income or used to calculate your cost basis if you later sell the token.
- Later sale price : When you sell your token, make sure to record the sale price. This will affect your capital gains or losses and the amount of tax you pay.
Conclusion
Airdrops can be a useful way to obtain new tokens, but you must understand the tax laws surrounding airdrops to avoid tax complications. Track what you receive, know the value at the time you received it, and don’t ignore capital gains when you sell. It is always a good idea to check your local tax laws for clarification.
Source: https://coingape.com/blog/are-airdropped-tokens-really-taxable/
