Op-ed: Even free crypto is taxable

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Crypto holders are always on the lookout for airdrops or free crypto, but many ignore the associated tax obligations. If you are based in the United States, this is not good news regarding airdrop taxes.

Airdrops have become an increasingly popular method for public token distribution projects. These airdrops often involve the spontaneous delivery of free tokens to users’ digital wallets. Although receiving free tokens may seem like a godsend, it is essential to understand the tax implications associated with them. In this article, take a deep dive into the basics of airdrop taxes, factors influencing taxation, and steps you can take to stay compliant with the IRS.

What is an Airdrop?

Airdrops are a promotional strategy that cryptocurrency projects use to distribute new tokens to users. They involve sending tokens to the digital wallets of individuals who have met certain requirements, such as holding a specific cryptocurrency, participating in a project, or promoting it on Twitter.

IRS tips on airdrop taxes

In 2019, the IRS issued a tax ruling to clarify the tax treatment of cryptocurrency airdrops and forks. According to the guidelines, the fair market value of tokens received through airdrops is considered taxable income. One of the common challenges is that it can be difficult to assign a fair market value to an airdrop. If so, the IRS recommends using a reasonable method that is applied consistently.

It’s worth talking to an accountant who can walk you through this process if you’re unsure of fair market value. It is essential to keep a detailed record of the airdrops you receive, including the date, number of tokens, and FMV at the time of the airdrop. This information will be needed to accurately report your income and calculate your tax payable.

What about other revenue-based cryptos, such as Learn&Earn programs and DeFi yield?

While there have been no specific IRS guidelines on Learn & Earn or DeFi programs, income-based rewards are generally treated as income at fair market value. DeFi protocols, in particular, can pose significant tax challenges, primarily because record keeping can be tricky.

There are potentially several taxable transactions when engaging with DeFi platforms and lending, borrowing, and trading activities. The tax implications for these platforms may even vary depending on the specific service used.

One thing to note is that the tax rules differ if you are running a real business rather than trading as an individual investor subject to capital gains tax. If you think your crypto business is sophisticated enough to be a business, talk to a tax professional who can help you navigate these rules.

Stay compliant with IRS regulations

To ensure you remain compliant with IRS regulations, consider the following:

Keep Detailed Records Using Software: Keep a record of all airdrops you receive, including the date, number of tokens, and their fair market value. Consult a tax professional: If you are unsure about the tax treatment of airdrops or need assistance with reporting, it is best to consult a tax professional familiar with cryptocurrency taxation.

With just a few days left until the tax deadline for many countries, crypto holders should be aware of the tax implications associated with airdrops and other free tokens they may have acquired over the past year. It is also advisable to consult a tax professional familiar with cryptocurrency taxation for those who are unsure of the tax treatment of airdrops and other crypto income.

Disclaimer: The opinions of our editors are their own and do not reflect the opinion of CryptoSlate. None of the information you read on CryptoSlate should be taken as investment advice, and CryptoSlate does not endorse any project that may be mentioned or linked in this article. Buying and trading cryptocurrencies should be considered a high-risk activity. Please exercise due diligence before taking any action related to the content of this article. Finally, CryptoSlate takes no responsibility if you lose money trading cryptocurrencies.

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