How Are Airdropped NFTs Taxed? What You Need To Know When It’s Time To Fill Out Your Tax Return

January 19, 2023

NFTs have been around for a while already and have become more well-known in the past couple of years, namely through NFT art. As NFTs and what they can offer brands and businesses have evolved, so has the addition of utility to said NFTs. The utility one can add is meant to add more uses for the collector (holder) as well as the NFT collection creator. That is where the idea of the airdrop comes in, which is meant as a gift of a free token to your holders, to build community, raise awareness, etc. However, did you know that these NFT airdrops are taxed? Below we will take a look at NFT airdrop taxation and hopefully answer all your queries on this subject. 

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How are airdrops treated from a tax perspective?

Although each country has its own set of tax regulations and the IRS is still setting rules and regulations surrounding Web3, cryptocurrency, NFTs and the NFT utilities that come along with it, there are some general guidelines already in place. Although cryptocurrency is only considered taxable once sold, in the case of airdropped tokens, most countries state that airdropped “income” should be treated as ordinary income based on fair market value at the time of receipt and taxed based on the tax bracket you fall under.

When should I recognize income from an airdrop? 

The tax regulations are still evolving in this area and it is best to get advice from a tax professional before filing your income tax return, especially since different countries view airdropped tokens differently. Note that multiple airdropped tokens that have different tax implications. For example, you need to take the gains or losses for each of them separately, long-term gain (if you held the token for more than one year) or short-term gain (if you held the token for one year or less). The regulations are constantly being fine tuned and differ from country to country so best to consult with a tax professional or look into online. 

How are NFT airdrops taxed? 

In most countries the stance of NFT airdrops is the same, it is viewed as a form of income, making them subject to income tax. For example, to be up to date with the IRS’s regulations it is best to check online for the US Crypto Tax guide. In the UK for example, the NFT Airdrops are taxed as income if you did something to earn them, like promote the collection for them, like an influencer let’s say. But if you get the airdrop without taking any action then it’s not taxed. There are several other guidelines and as already mentioned it is best to check it according to the country you pay your taxes in to know what the regulations are. 

Common airdrop issues

A free giveaway that is spread to many different crypto wallets that one can’t always decide as to whether one wants to accept the token or not. As they are considered assets which are taxable this in turn can cause problems for investors that are given tokens “against their will”. As they are meant to pay tax based on the value they have at the time they were airdropped to you, you could find yourself at a loss if the token’s value falls. Also if you are scammed, the losses you incur because of the scam will still not be deductible.  

Final words

Not all that glitters is gold, as is the case with airdrops, as they are taxed and what seems like a great token that adds immediate value to holderes be aware that it comes with a price. Tax professionals can best advise as to what airdrops are taxable and which tokens are truly great incentives. 

 

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FAQs

Do I have to report an airdrop I didn’t want?

The short answer is, yes you need to report it, as it's considered a form of income. However, if the value of the airdrop falls below the threshold you may not need to. Best to check with a tax professional.

What do I report if I was airdropped an asset that is now worthless?

You would report it in the same way you would report any other “loss” on your tax return. The regulation may also be that you need to report it at the market value price of when you got it. However, it is best to check your country’s regulations regarding aidrops.

What do I report if the value of my airdropped token spiked and then plunged?

The short answer to this, is that you would report it in the same way on your taxes as if you had sold the token. However,  the IRS regulations are not yet very clear as to if the airdrop should be thought of as an income at the time the airdrop becomes available or at the time the rewards are claimed. 

What can I do if I was the victim of an airdrop scam?

Sure, NFT airdrop scams exist, if they seem too good to be true or arrive at you randomly the best way to avoid them is to ask your community. Most likely if your community has heard of the company doing the drop.  

How will the IRS know if I got an airdrop?

There are several ways for the IRS to know, after all transactions happen on the blockchain which is publicly available. The IRS may know through 3rd party reporting or information that appears on a tax return. It is important to report airdrop transactions on your tax return.