In the US, the IRS originally released cryptocurrency guidance in 2014 and followed it up on October 2019 with additional cryptocurrency tax guidance.

Overview

Airdrops are free coins that are sent to your wallet. Coins are generally airdropped to your wallet by ICO issuers to increase awareness and improve marketing and publicity for the project. Sometimes you may get coins through airdrops, and you may not even know about it (until you check your CoinTracker account!).

Taxing Airdrops

The IRS has specified that new coins received through an airdrop are taxed as ordinary income. Therefore, you owe income taxes on new coins you have in your wallet as a result of an airdrop (regardless of whether you intended to own these coins or not). The amount of income is the fair market value of the airdropped coins at the time they are received in the wallet.

Note: this is a pretty bold stance from the IRS and can result in you owing income taxes on your cryptocurrency even if you are just a HODLer, holding coins without proactively making any transactions.

Let’s look at an example. If Max has an Ethereum (ETH) wallet and a token project (TOKEN) sends an ICO token to his wallet, he needs to report the newly received tokens as taxable ordinary income (not a capital gain). This is true whether or not Max sells the token.

Let’s say the fair market value of the TOKEN at the time he receives it is $5. He will have to pay ordinary income taxes on $5. In addition, the amount Max reports as ordinary income becomes his basis for the new TOKEN ($5), and he will use it to calculate capital gains/losses if/when he sells his TOKEN in the future.

CoinTracker allows you to mark any received coins (from the Transactions page) as an "airdrop" so you can see the amount of ordinary income you have (on the Tax page), in addition to the capital gains which are already tracked separately. This income will be reported as “other income” on your IRS Form 1040 (separate from your IRS Form 8949 where your capital gains are reported from your cryptocurrency disposals).

Example CoinTracker transaction marked as an "Airdrop"

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Disclaimer: this post is informational only and is not meant as tax advice. For tax advice please speak with a tax professional.