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Crypto Airdrop Taxes Explained: How the IRS Taxes "Free" Crypto

This guide is regularly updated to reflect current IRS guidance on cryptocurrency airdrops.

Quick Answer

Often, yes—airdrops can be taxable. In general, when you receive digital assets and can control them (sell, swap, transfer, or otherwise dispose of them), you may have ordinary income equal to the asset's fair market value (FMV) at that time. This approach aligns with the IRS treating virtual currency/digital assets as property and taxing "accessions to wealth" when you have dominion and control.

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Important nuance: IRS published guidance in Revenue Ruling 2019-24 specifically addresses airdrops in connection with a hard fork. Other airdrop scenarios (promotional airdrops, retroactive rewards, governance token distributions) may require applying general tax principles to your specific facts.

 

Key Points

  • Airdrops are generally taxable as ordinary income when you have dominion and control—not capital gains

  • Income is typically recognized when tokens appear in your wallet and are transferable

  • Taxable amount equals fair market value at receipt

  • FMV at receipt becomes your cost basis for later capital gains calculation

  • If FMV is genuinely difficult to determine, use the best available evidence and document your methodology thoroughly

  • Form 1099-DA focuses on sales/exchanges—airdrops may not appear on broker forms

  • You must self-report airdrop income regardless of whether you receive a tax form

What Is an Airdrop (for Tax Purposes)?

An airdrop is a distribution of tokens to wallet addresses. Common types include:

  • Promotional airdrops: Marketing distributions to build community

  • Retroactive airdrops: Rewards for past protocol usage (e.g., Uniswap UNI, Arbitrum ARB)

  • Fork-related airdrops: New tokens distributed when a blockchain splits

  • Governance token distributions: Tokens granting voting rights in protocols

 

IRS Guidance: Revenue Ruling 2019-24

Revenue Ruling 2019-24 provides the IRS's position on airdrops received in connection with a hard fork:

"If a hard fork is followed by an airdrop and the taxpayer receives new cryptocurrency, the taxpayer has ordinary gross income... equal to the fair market value of the new cryptocurrency when it is received."

 

Key principles from the ruling:

  • Receipt means obtaining dominion and control

  • Dominion and control means the ability to transfer, sell, exchange, or otherwise dispose of the cryptocurrency

  • The amount of income equals FMV at the time dominion and control is obtained

  • This FMV becomes your cost basis in the received cryptocurrency

 

Note: While Rev. Rul. 2019-24 specifically addresses fork-related airdrops, its principles regarding dominion and control and ordinary income treatment are generally applied to other airdrop types under standard tax rules (IRC § 61).

 

When Do You Have "Dominion and Control"?

The timing question is crucial because it determines when income is recognized and at what value.

You're more likely to have taxable income when:

  • Tokens are credited to your wallet/account, and

  • You are able to transfer, trade, sell, or otherwise dispose of them

 

You're less likely to have taxable income (yet) when:

  • Tokens are locked, unvested, or non-transferable

  • You must take action to claim but haven't claimed yet

  • Technical issues prevent access (network not launched, contract not deployed)

  • Tokens are in an address you don't control

 

Claimable vs. Automatic Airdrops

Automatic airdrops: Tokens appear in your wallet without action. Dominion and control is typically established when tokens arrive and are accessible.

 

Claimable airdrops: You must take action (connect wallet, sign transaction) to receive tokens. Dominion and control may not exist until you claim. However, this is a nuanced area—if the claim is a mere formality with no risk of forfeiture, the IRS might argue constructive receipt earlier.

 

Conservative approach: For high-value airdrops with long claim windows, consider recognizing income when tokens become claimable rather than when claimed.

 

Calculating Fair Market Value

FMV at receipt determines both your taxable income and your cost basis. Getting this right is critical.

 

For tokens with liquid markets:

  • Use exchange price at the date and time of receipt

  • Check multiple sources (CoinGecko, CoinMarketCap, exchange APIs)

  • Document the price and source

  • Use a consistent methodology

 

For tokens without liquid markets:

  • Check DEX liquidity pools for implied pricing

  • Look for OTC transactions or private sales

  • Consider fundamental valuation if no market exists

  • Document your methodology thoroughly

 

When FMV Is Difficult to Determine

If FMV is genuinely difficult to determine (thin liquidity, no reliable market), use the best available evidence and document your methodology. The IRS generally requires taxpayers to use a reasonable method to determine FMV.

 

Caution: Treating FMV as "$0" is a high-risk position unless you can clearly support that no reasonable valuation exists. If you take this position:

  • Document thoroughly why the token had no determinable value at receipt

  • Your cost basis would then be $0

  • 100% of later sale proceeds would be capital gain

  • Be prepared to defend this position if challenged

 

How to Report Airdrop Income

Airdrops are ordinary income, not capital gains. Here's where to report:

At Receipt (Ordinary Income)

  • Schedule 1, Line 8z ("Other Income"): Report FMV as ordinary income

  • Include a description like "Cryptocurrency airdrop income"

  • If activity rises to a trade or business, Schedule C may be appropriate

 

At Later Sale (Capital Gain/Loss)

  • Form 8949: Report sale with proceeds and cost basis (FMV at receipt)

  • Schedule D: Summary of capital gains/losses

  • Holding period starts from date of receipt (when you had dominion and control)

 

Will You Get a Tax Form?

It depends. Some platforms may issue information statements for certain distributions.

 

Important: Form 1099-DA is oriented toward broker reporting for sales and exchanges of digital assets—not "receipt events" like most airdrops. So airdrops typically won't be captured on Form 1099-DA the way sales are.

 

Even if you receive no form, you are still responsible for reporting taxable income. The absence of a 1099 does not mean the income is non-taxable.

 

Common Airdrop Mistakes to Avoid

  • Ignoring airdrops entirely: Creates timing and basis problems later

  • Using inconsistent FMV: Different values for income vs. basis

  • Missing recordkeeping: Not documenting wallet addresses, timestamps, valuation sources

  • Assuming "$0" without analysis: High-risk position if token later becomes valuable

  • Confusing receipt date with claim date: When you have dominion and control matters

 

Self-Employment Tax Considerations

Airdrops are generally not subject to self-employment tax unless the activity rises to the level of a trade or business. Unlike mining or staking as a business, passive receipt of airdropped tokens typically doesn't trigger SE tax.

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However, this is a facts-and-circumstances determination. If you're actively farming airdrops as a regular business activity, consult a tax professional about potential SE tax implications.

 

When Professional Review Is Appropriate

Professional review is commonly appropriate if:

  • You received high-value airdrops (>$10,000)

  • You have numerous airdrops across multiple wallets

  • Tokens had unclear valuation at receipt

  • You received governance tokens from major protocols

  • You're unsure about dominion and control timing

  • You didn't report airdrops in prior years

  • Vesting schedules or claim windows create timing questions

 

Schedule a consultation to ensure your airdrop income is properly reported.

Frequently Asked Questions

Are cryptocurrency airdrops taxable?

Generally yes. Airdrops are typically taxable as ordinary income when you obtain dominion and control. The taxable amount is the fair market value at receipt.

 

When is airdrop income recognized?

When you obtain dominion and control—typically when tokens appear in your wallet and you can transfer or sell them. Locked or unvested tokens may defer recognition.

 

What if the airdrop has no value when received?

If FMV is genuinely difficult to determine, use the best available evidence and document thoroughly. Treating value as "$0" is a high-risk position—your cost basis would then be zero, making 100% of later proceeds taxable.

 

How do I calculate fair market value?

Use exchange prices, DEX rates, or price aggregators (CoinGecko, CoinMarketCap) at the date and time of receipt. Document your source and methodology.

 

Do I need to report airdrops I didn't claim?

Generally no. If you never claimed and tokens remain unclaimed, you likely don't have dominion and control. However, if tokens auto-deposited to your wallet and you could sell them, they may be taxable even if ignored.

 

What form do I use to report airdrops?

Schedule 1, Line 8z ("Other Income") for the income at receipt. Later sales go on Form 8949 and Schedule D using your cost basis (FMV at receipt).

 

Does Rev. Rul. 2019-24 apply to all airdrops?

Rev. Rul. 2019-24 specifically addresses airdrops in connection with hard forks. Other airdrop types (promotional, retroactive, governance) generally apply the same principles under standard tax rules, but the ruling doesn't explicitly cover every scenario.

 

Next Steps

If you received cryptocurrency airdrops:

  1. Inventory all airdrops received during the tax year

  2. Document FMV at receipt for each (with sources)

  3. Determine when you obtained dominion and control

  4. Report total airdrop income on Schedule 1

  5. Track cost basis for later sales

  6. Consider professional review for high-value or complex situations

About the Author

Greg Monaco, CPA is a New Jersey-licensed CPA and the founder of Monaco CPA. He focuses on cryptocurrency taxation, DeFi tax reporting, and complex digital asset compliance for clients nationwide.

 

Sources and Citations

 

Related Guides

 

Disclosure: This guide is general information, not legal or tax advice. Your specific facts determine the outcome.

 

Last updated: December 22, 2025

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