Airdrops and hard forks can feel like winning the lottery — tokens appearing in your wallet out of nowhere. But "free" crypto comes with tax obligations that catch many investors off guard.
Here's exactly when income is recognized, how cost basis works, and how to report both correctly.
The Core Tax Rule
Event | Tax Treatment | When Taxed |
|---|---|---|
Airdrop received | Ordinary income | When you gain "dominion and control" |
Hard fork tokens received | Ordinary income | When you can access and use the tokens |
Selling airdropped/forked tokens | Capital gain or loss | When you dispose of them |
Key IRS guidance: Revenue Ruling 2019-24 establishes that tokens from hard forks (and related airdrops) are taxable as ordinary income at fair market value when received.
Airdrops: Income Recognition
When Is Income Recognized?
The IRS uses the "dominion and control" standard — you have taxable income when you can transfer, sell, exchange, or otherwise dispose of the tokens.
Airdrop Type | Income Recognition Date |
|---|---|
Direct to wallet | When tokens arrive and you can use them |
Claim required | When you successfully claim (not when eligible) |
Exchange-based | When exchange credits your account |
No market exists | When a market becomes available |
The "No Market" Exception
If airdropped tokens have zero fair market value because no exchange lists them yet, you generally don't recognize income until a market exists.
Once tradeable → that's your income recognition date and FMV baseline.
Cost Basis: $0 or FMV?
Cost basis = Fair Market Value at time of receipt
This is critical. Your cost basis is NOT zero — it's the FMV you reported as income.
Scenario | Cost Basis |
|---|---|
Reported $500 as income when received | $500 |
Token had no market, reported $0 | $0 |
Forgot to report income | Still FMV at receipt (fix with amended return) |
Hard Forks: Income Recognition
What Triggers a Taxable Event?
A hard fork alone does NOT create taxable income. You only owe taxes if:
The fork results in new tokens, AND
You actually receive those tokens, AND
You have dominion and control over them
Situation | Taxable? |
|---|---|
Fork happens, you receive new tokens | Yes — ordinary income |
Fork happens, you don't receive anything | No |
Fork happens, exchange doesn't support new token | No — until they credit it |
Fork happens, you can't access new tokens | No — until you gain access |
Real-World Example: Bitcoin Cash (BCH)
The fork: August 2017, Bitcoin Cash split from Bitcoin.
Tax treatment:
You held 2 BTC before the fork
After the fork, you received 2 BCH
BCH was worth $300 each when you gained access
Taxable income: $600 (2 × $300)
Cost basis for BCH: $600
When you later sell that BCH:
Sale price minus $600 cost basis = capital gain or loss
Holding period starts from when you received the BCH
The Double Tax Trap
Airdrops and hard forks create two taxable events:
Event | Tax Type | Rate |
|---|---|---|
Receiving tokens | Ordinary income | 10-37% |
Selling tokens | Capital gains | 0-20% (or 10-37% if short-term) |
Example: UNI Airdrop
September 2020: You received 400 UNI tokens worth $2 each.
Step 1 — Income recognition:
400 × $2 = $800 ordinary income
Report on Schedule 1, Line 8z ("Other income")
Cost basis established: $800
Step 2 — Later sale:
You sell 400 UNI at $10 each = $4,000
Capital gain: $4,000 - $800 = $3,200
Report on Form 8949 and Schedule D
Total tax exposure: Income tax on $800 + capital gains tax on $3,200
The Price Drop Problem
One of the most painful airdrop tax scenarios:
Timeline | Value |
|---|---|
Day 1: Receive 1,000 tokens | FMV = $5,000 |
Tax filing: Report income | $5,000 ordinary income |
Day 180: Token crashes | Now worth $500 |
You owe taxes on | $5,000 (even though it's now worth $500) |
What you can do:
Sell the tokens to realize a $4,500 capital loss
Use that loss to offset other gains
If no gains, deduct up to $3,000 against ordinary income
Carry forward remaining losses
Unsolicited Airdrops (Dust Attacks)
Random tokens appearing in your wallet — often scams — are still technically taxable.
Situation | Treatment |
|---|---|
Tokens have market value | Report FMV as income (usually tiny) |
Tokens have no market | No income until market exists |
Scam tokens (can't sell) | Likely $0 FMV — no income |
Practical reality: Most unsolicited airdrops are worth pennies. Report them if they have measurable value, but don't lose sleep over $3 worth of random tokens.
Gas Fees on Claimed Airdrops
If you pay ETH gas fees to claim an airdrop, that's a separate taxable event.
Action | Tax Treatment |
|---|---|
Pay 0.01 ETH ($25) to claim airdrop | Disposal of ETH — potential capital gain/loss |
Receive airdrop worth $500 | $500 ordinary income |
Your ETH gas payment:
Cost basis of the 0.01 ETH you spent
Minus $25 (current value)
= Capital gain or loss on that ETH
Yes, it's complicated. Yes, it's technically correct.
Reporting Requirements
Airdrops
Form | What to Report |
|---|---|
Schedule 1, Line 8z | FMV as "Other income" — write "Crypto airdrop" |
Form 8949 | When you sell (include cost basis = FMV at receipt) |
Schedule D | Summary of capital gains/losses |
Hard Forks
Form | What to Report |
|---|---|
Schedule 1, Line 8z | FMV of forked tokens as "Other income" |
Form 8949 | When you sell forked tokens |
Schedule D | Summary of capital gains/losses |
The Form 1040 Digital Asset Question
The checkbox at the top of Form 1040 asks about digital assets. If you received airdrops or hard fork tokens, the answer is "Yes" — even if you didn't sell anything.
Common Mistakes to Avoid
Mistake | Why It's Wrong |
|---|---|
Not reporting airdrops because "they were free" | Income is income — the IRS doesn't care it was free |
Using $0 cost basis when you reported income | Cost basis = FMV you reported |
Reporting income at claim date when you received tokens earlier | Income recognized when you gain control |
Ignoring hard fork tokens you never claimed | If you CAN claim them, you may owe taxes |
Not tracking the exact timestamp | FMV can change significantly within hours |
Record-Keeping Checklist
For every airdrop and hard fork, document:
[ ] Date and time tokens became accessible
[ ] Number of tokens received
[ ] Fair market value per token (screenshot from exchange/CoinGecko)
[ ] Total FMV in USD
[ ] Wallet address that received tokens
[ ] Transaction hash (if applicable)
[ ] Whether you had to claim or tokens arrived automatically
Quick Reference: Airdrop vs. Hard Fork
Factor | Airdrop | Hard Fork |
|---|---|---|
What triggers it | Project distributes free tokens | Blockchain protocol splits |
How you get tokens | Direct deposit or claim | Automatic if you held original coin |
Tax trigger | Dominion and control | Dominion and control |
Income type | Ordinary income | Ordinary income |
Cost basis | FMV at receipt | FMV at receipt |
IRS guidance | Rev. Rul. 2019-24 | Rev. Rul. 2019-24 |
The Bottom Line
Question | Answer |
|---|---|
When is income recognized? | When you have dominion and control (can use the tokens) |
Is cost basis $0 or FMV? | FMV at time of receipt — this becomes your cost basis |
Do I owe taxes on tokens I didn't ask for? | Yes, if they have fair market value |
What if the price drops after I receive them? | You still owe income tax on the original FMV |
What if I can't sell them? | No market = no income until a market exists |
Free tokens come with tax strings attached. Track them carefully, report them accurately, and plan for the tax bill before you spend the proceeds.
Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Consult a qualified tax professional for advice specific to your situation.
By Ran Chen, EA, CFP®