Cryptocurrency holders are always looking for airdrops and free cryptocurrencies, but many do not consider the tax liability involved.
Airdrops are becoming an increasingly popular way for projects to distribute their tokens to the public. These airdrops often deliver free tokens to the user’s digital wallet without prompting. Receiving free tokens may seem like a coincidence, but it is essential to understand the tax implications associated with them. This article covers airdrop tax basics, factors that affect taxation, and steps you can take to stay IRS compliant.
What is airdrop?
air drop A promotional strategy employed by cryptocurrency projects to distribute new tokens to users. Tokens must be sent to digital wallets of individuals who meet certain requirements, such as holding certain cryptocurrencies, participating in projects, or promoting on Twitter.
IRS Guidance on Airdrop Tax
In 2019, the IRS will revenue determination Clarify the tax treatment of cryptocurrency airdrops and forks. According to the guidance, the fair market value of tokens received through airdrops will be considered taxable income. One common challenge is that it can be difficult to assign a fair market value to airdrops. In this case, the IRS recommends using “consistently applied reasonable methods.”
If you are unsure of the fair market value, it is worth consulting with an accountant who can guide you through this process. It is imperative to keep a detailed record of the airdrops received, including the date, number of tokens, and his FMV at the time of the airdrop. This information is necessary to accurately report your income and calculate your tax liability.
What about other “earn” based cryptos such as Learn&Earn programs and DeFi yields?
While there is no specific IRS guidance for Learn & Earn programs or DeFi, revenue-based compensation is generally treated as income at fair market value. DeFi protocols in particular can pose significant challenges when it comes to taxation, mainly due to the difficulty of record keeping.
There are potentially multiple taxable transactions when engaging in DeFi platforms and conducting lending, borrowing, and trading activities. The tax implications of these platforms will vary depending on the specific services you use.
One thing to note is that tax rules are different if you are running a pure business rather than trading as a retail investor subject to capital gains tax. If you feel sophisticated, consult a tax professional who can help you navigate these rules.
Stay compliant with IRS regulations
To ensure compliance with IRS regulations, consider the following:
- Use software to maintain detailed records: Maintain a record of all airdrops received, including date, number of tokens, and fair market value.
- Consult a tax professional: If you have any questions about airdrop tax treatment or need reporting assistance, we recommend that you consult a tax professional familiar with the taxation of cryptocurrencies.
With tax deadlines only days away in many countries, crypto holders should be aware of the tax implications associated with airdrops and other free tokens they may have acquired during the last year. .consulting tax expert It is also recommended that you are familiar with cryptocurrency taxation if you are unsure about the tax treatment of airdrops or other cryptocurrency earnings.