Have you ever taken up "free" crypto from an airdrop without thinking twice? It’s considered income, which always comes with a tax. Here’s how to calculate income from crypto airdrops and how much in taxes you’ll pay on them.
1. Are Crypto Airdrops Taxed?
Yes. The IRS's cryptocurrency tax guidelines from 2019 states that all crypto received from airdrops are subject to income tax. Regardless of whether you intended to receive it or not, once free crypto enters your wallet or exchange account, it’s considered ordinary income.
However, income might be calculated differently even though you receive all the crypto on the same day due to dominion and control, which is the right to control (transact, sell, or trade) the airdropped crypto. Sometimes you gain dominion and control the moment you receive the airdrop, sometimes later. The IRS states that the fair market value (FMV) of the airdropped crypto is taxable on the date you gain dominion and control over it. In other words, if you do not have access to the airdropped cryptocurrency yet, it is not considered a taxable event until you gain full access and control over it.
i.e.) Let's say you receive 500 units of crypto A and the FMV is $2 per unit when you gain dominion and control over it.
Then your ordinary income is $2 x 500 = $1,000 and it becomes the cost basis when you sell or trade your 500 units of crypto A in the future.
2. How Is Crypto Airdrop Income Calculated?
All airdrop income is calculated based on its FMV when you gain dominion and control over the airdropped cryptocurrency.
i.e.) Let's say you receive 500 units of crypto A and 700 units of crypto B each via airdrop in the same year. When you gain control over these airdropped tokens, crypto A is $2 per unit and crypto B is $3 per unit.
Then your taxable income is $3,100, the sum of the FMVs of each airdropped crypto.
Crypto A $1,000 ($2 x 500 units) + Crypto B $2,100 ($3 x 700 units) = $3,100
3. How To Report Crypto Airdrops on Your Taxes
The following image is the actual Schedule 1 form used to report taxes.
You enter the value of the airdropped cryptocurrency in USD on line 8, Other income.
Notes on Crypto Airdrops and Taxes
Calculating your actual taxes may be far more complicated depending on the types and scales of your income. It isn't easy to make individual calculations for every airdrop you ever receive, so some of that income might go missing on your tax report, which is why you need to be careful. Cointelli makes it easy to get an accurate tax report by providing you with the information you need for your complicated tax report, including your airdrop income. Cointelli will help your airdrop income not to go missing. Learn more about Cointelli here!
Got any crypto tax questions? Ask us on Twitter! Our co-founder & crypto tax expert Daniel @Cointelli_Dan will answer you directly!