Are Crypto Airdrops but are they Taxable by IRS

Are Crypto Airdrops Taxable by IRS

One of the most complicated aspects of cryptocurrency taxation in the United States is simply determining when a certain event is considered taxable for IRS purposes. For example, when a person exchanges cryptocurrency, in most situations this will be considered a taxable event — but what happens for example if there is an airdrop in which certain units of cryptocurrency are received by a taxpayer — are they taxable. In general, airdrops are going to be taxable when received, because from the IRS’ perspective — when the US Taxpayer received the Airdrop, they received a form of income —  but the key component is whether or not the taxpayer has dominion and control over the cryptocurrency.

Crypto Airdrops Revenue Ruling 2019-24

Revenue ruling 2019–24 involves the taxation primarily of airdrops and hard forks. Let’s go through the basics of what’s provided for airdrops:

• • • An airdrop is a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers.

    • A hard fork followed by an airdrop results in the distribution of units of the new cryptocurrency to addresses containing the legacy cryptocurrency.

    • However, a hard fork is not always followed by an airdrop.

    • Cryptocurrency from an airdrop generally is received on the date and at the time it is recorded on the distributed ledger. However, 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 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.

Crypto Airdrop Example from IRS

• • • “Situation 2: B holds 50 units of Crypto R, a cryptocurrency.

    • On Date 2, the distributed ledger for Crypto R experiences a hard fork, resulting in the creation of Crypto S.

    • On that date, 25 units of Crypto S are airdropped to B’s distributed ledger address and B has the ability to dispose of Crypto S immediately following the airdrop.

    • B now holds 50 units of Crypto R and 25 units of Crypto S.

    • The airdrop of Crypto S is recorded on the distributed ledger on Date 2 at Time 1 and, at that date and time, the fair market value of B’s 25 units of Crypto S is $50. B receives the Crypto S solely because B owns Crypto R at the time of the hard fork.

    • After the airdrop, transactions involving Crypto S are recorded on the new distributed ledger and transactions involving Crypto R continue to be recorded on the legacy distributed ledger.”

IRS Airdrop Law and Analysis

• • • Situation 2: B received a new asset, Crypto S, in the airdrop following the hard fork; therefore, B has an accession to wealth and has ordinary income in the taxable year in which the Crypto S is received. See §§ 61 and 451.

    • B has dominion and control of Crypto S at the time of the airdrop, when it is recorded on the distributed ledger, because B immediately has the ability to dispose of Crypto S.

    • The amount included in gross income is $50, the fair market value of B’s 25 units of Crypto S when the airdrop is recorded on the distributed ledger. B’s basis in Crypto S is $50, the amount of income recognized. See §§ 61, 1011, and 1.61-2(d)(2)(i).

Result of New Airdrop Received

• • • (2) 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.

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