Yes, airdrops are taxable income.
Actual IRS Guidance on Airdrops
Somewhat surprisingly, the IRS has issued specific guidance with respect to airdrops. As we’ve noted previously, guidance is lacking on the majority of crypto topics. Staking, as ubiquitous as it now is, has still not received any mention. No NFT-specific guidance has been issued yet. And the IRS has been silent on crypto lending.
If I were to venture a guess as to why they’ve addressed airdrops specifically, it would be because both Bitcoin and Ethereum both have had hard forks – with resulting airdrops. Those tokens are of course the two largest cryptocurrencies and the first hard fork goes all the way back to 2014. Even with that, it took the IRS until 2019 to issue any guidance.
But at least they have.
So, what does that guidance say?
In Revenue Ruling 2019-24, the IRS noted the following:
- “Cryptocurrency from an airdrop generally is received on the date and at the time it is recorded on the distributed ledger.”
- “A taxpayer has gross income, ordinary in character, under § 61 as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency.”
- Section 451 of the Code provides that a taxpayer using the cash method of accounting includes an amount in gross income in the taxable year it is actually or constructively received. See §§ 1.451-1 and 1.451-2. A taxpayer using an accrual method of accounting generally includes an amount in gross income no later than the taxable year in which all the events have occurred which fix the right to receive such amount.”
For the vast majority of airdrops, that is how they would be taxed: upon receipt.
Some Airdrops Are Not Immediately Taxable
But there are a few exceptions to this rule. While you generally have “domain and control” over the tokens on the date they are received, this is not always the case. The current structure of Gala Games nodes is an excellent example of this. RR 2019-24 gives expanded examples of how this could happen, but the basic crux is captured in this paragraph:
“A taxpayer may constructively receive cryptocurrency prior to the airdrop being recorded on the distributed ledger. A taxpayer does not have receipt of cryptocurrency when the airdrop is recorded on the distributed ledger if the taxpayer is not able to exercise dominion and control over the cryptocurrency. For example, a taxpayer does not have dominion and control if the address to which the cryptocurrency is airdropped is contained in a wallet managed through a cryptocurrency exchange and the cryptocurrency exchange does not support the newly-created cryptocurrency such that the airdropped cryptocurrency is not immediately credited to the taxpayer’s account at the cryptocurrency exchange.”
If that example describes your airdrop – the exchange or other factors are prohibiting your ability to actually exercise control over the token – then you would not claim it as taxable income upon receipt.
However, this is not an indefinite deferral. The next sentence states that:
“If the taxpayer later acquires the ability to transfer, sell, exchange, or otherwise dispose of the cryptocurrency, the taxpayer is treated as receiving the cryptocurrency at that time.”
While deferring the tax hit from the airdrop is largely positive, it is not without its downsides. Your holding period does not begin until you gain domain and control over the asset. This can have major repercussions when you ultimately sell your tokens, as we noted in our capital gains holding period article.
Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
