Taxes for Airdrops and Rewards?

[jerry0]

So in one of my wallets, i get some rewards buts its very little.  Its with waves and i got some waves and also some other airdrops a while back like vostok a while back.  The issue is those don't seem to be worth much or anything anymore.  Some that use to be a dollar i believe is zero now.  Assuming you never cashed them out or sold them for another coin, how does that work?  The thing is say you get that as profit but you never cash them out... let say your rewards are a few hundred dollars to make it simple or even 50 dollars.  Do you have to file any capital gains on this?  Now say you have to but again never cash out... then in the future... those airdrops etc go to zero... then what happens?  You basically paid taxes on that small profit but because you didn't cash it out, you are screwed?  Example say you earned 500 dollars worth of rewards/airdrops... you pay thirty five percent tax... then when it gets to 0... well now you basically lost out on it because you didn't cash out?  If so, wouldn't that mean if you get rewards/airdrops, you need to always cash out? 

[jseverson]

Assuming you live in the US, you should have paid taxes for them (as income) when you received them. You don't pay capital gains for them until you sell or convert.

If so, wouldn't that mean if you get rewards/airdrops, you need to always cash out? 

You can file for a loss, so not necessarily.

[squatter]

Assuming you live in the US, you should have paid taxes for them (as income) when you received them.

Not so fast -- lets unpack at what the IRS is saying here:

When you receive cryptocurrency from an airdrop following a hard fork, you will have ordinary income equal to the fair market value of the new cryptocurrency when it is received, which is when the transaction is recorded on the distributed ledger, provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency.

This is actually written in a way that confuses airdrops with hard forks, but let's ignore that for now since the OP is only interested in airdrops.

The key point is about fair market value when the cryptocurrency is received. In most cases, airdropped tokens have no value at the time of the airdrop since they aren't listed on secondary exchanges yet. This means there is no taxable income at the time of receipt. Capital gains tax would be due on the full realized value of the tokens when sold.

In the case that airdropped tokens do actually have value when received, there is also a question as to what constitutes "dominion and control."

Specifically, the Congresspersons write that the IRS appears to adopt a “dominion and control” standard to determine whether a taxable event occurs with respect to airdrops and hardforks.  The letter continues that the IRS “appears to suggest that taxpayers may have dominion and control, and thus be taxed on forked or airdropped assets when the fork or airdrop occurs, even if the taxpayer has no knowledge, and even if the taxpayer takes no affirmative step, or manifests any intention to claim or access those forked or airdropped coins.”  The Congresspersons posit that this standard is inconsistent with established rules applicable to the income tax treatment of unsolicited prizes or samples.

The letter then specifically requests answers to the following questions:

Does the IRS intend to clarify its standard for finding dominion and control over forked assets wherein some level of knowledge and actual affirmative steps taken are necessary to find that the taxpayer has dominion and control?

You can file for a loss, so not necessarily.

In general, you can only file for capital losses up to $3,000 per year. Anything past that has to be deferred to future tax years, at the same limit.

This is especially problematic if your exchange credits a hard fork or airdrop at an overinflated valuation and you don't -- or are unable to -- immediately sell. You could incur lots of ordinary income at the time of receipt, but won't be able to deduct all the capital losses in the same tax year, resulting in a large tax bill.

[Bitcoin_bullish]

let say your rewards are a few hundred dollars to make it simple or even 50 dollars.    

I don't know if a bill from February was passed that exempts reporting gains less than $200. (link).

If this law did pass then you won't need to declare this amount.

Assuming you live in the US, you should have paid taxes for them (as income) when you received them.

This is actually written in a way that confuses airdrops with hard forks, but let's ignore that for now since the OP is only interested in airdrops.

They do confuse them indeed. I think they are just talking about hard-forked coins exclusively. Although there are also airdrops that have lock period or other shenanigans not allowing to trade at a price which might be very high when received.

[jseverson]

-snip-

Excellent breakdown.

They do confuse them indeed. I think they are just talking about hard-forked coins exclusively.

They don't have specific rules for just airdrops, but I would expect them to treat it the same way as forked coins. The forked coin scenario is probably just a lot more common, because as squatter has said, most random airdrops have little to no value anyway.

[jerry0]

Okay so this means you don't have to pay taxes on airdrops unless you sell/trade them for something else right?  I believe for bitcoin cash and gold and those forks... if you didn't sell them for usd or trade them for anything... well you don't have to do anything for it.


Because it wouldnt make sense say you earned 500 dollars in airdrops when you received it.  Let say you didnt even know you received it... or even if you did... say its worth almost nothing at the end of the year... what happens then?  Or it goes to 600 at end of year but you never sold/traded it.  I cant imagine you report 600 and then next year if it drops to 0... then what?  You paid taxes on it but because you didnt sell it... now you lose?  I mean i can understand that tax situation with buying/selling crypto where you dont want to have a losing year etc but when its airdrops, its like unless you sell them immediately, wouldnt there be high chance you get freerolled so to speak?

[Saisher]

I'm glad my country is not imposing tax on airdrops and giveaways, it's better not to join an airdrop or giveaways if you are going to pay taxes because these airdrops and giveaways are not worth it, or if you think it has potential then that's the time that you will join, but how are theey going to know if you are not going to file it. 

[Argoo]

So in one of my wallets, i get some rewards buts its very little.  Its with waves and i got some waves and also some other airdrops a while back like vostok a while back.  The issue is those don't seem to be worth much or anything anymore.  Some that use to be a dollar i believe is zero now.  Assuming you never cashed them out or sold them for another coin, how does that work?  The thing is say you get that as profit but you never cash them out... let say your rewards are a few hundred dollars to make it simple or even 50 dollars.  Do you have to file any capital gains on this?  Now say you have to but again never cash out... then in the future... those airdrops etc go to zero... then what happens?  You basically paid taxes on that small profit but because you didn't cash it out, you are screwed?  Example say you earned 500 dollars worth of rewards/airdrops... you pay thirty five percent tax... then when it gets to 0... well now you basically lost out on it because you didn't cash out?  If so, wouldn't that mean if you get rewards/airdrops, you need to always cash out? 

You should not consider receiving a certain number of tokens on your wallet for participating in bounty ICO campaigns as real profit. Indeed, they may remain numbers in the wallet and may never become money. Therefore, there is no profit yet. That's when you exchange tokens for national money or other hard currency, from that time on, there will be a profit with which you will need to pay tax.

[squatter]

Okay so this means you don't have to pay taxes on airdrops unless you sell/trade them for something else right?  I believe for bitcoin cash and gold and those forks... if you didn't sell them for usd or trade them for anything... well you don't have to do anything for it.

Don't consider this legal advice, but if you're talking about forks where you held the private keys in your own wallet, then yes. Given that no secondary spot markets existed at the exact time the Bitcoin Cash or Gold ledgers were created -- exchanges only launched spot markets for them afterwards -- I think this is a strong legal position, although it hasn't been tested in court yet.

The trouble really arises when you're dealing with forks that were credited by an exchange. Coinbase and Bitstamp took months before they credited users with Bitcoin Cash. By the time customers received them, they had significant fair market value. In this case, customers in the US really can't escape the tax consequences. They would be on the hook for ordinary taxable income up to the equivalent amount they received.

Because it wouldnt make sense say you earned 500 dollars in airdrops when you received it.  Let say you didnt even know you received it... or even if you did... say its worth almost nothing at the end of the year... what happens then?

It would be great to get some clarity from the IRS as to whether knowledge of an airdrop or affirmative steps taken to claim it are required to establish "dominion and control." We don't know for sure yet. Members of Congress, the American Bar Association, and others have been asking for clarity because of the obvious problems with the IRS guidance.

[jerry0]

Anyone else?  So if you get waves to your waves wallet from leasing or other wallets like that... but you don't sell them... do you report that?  That also makes no sense because until you sell it... what if each one is worth 5 dollars and you got say 50 for the year so two fifty profit.  But you didn't sell them or anything or trade it but then later on it drops to 0... so you pay taxes on that two fifty... but then get screwed when its 0?  Because if you do report that, wouldnt you have to sell it immediately to not get freerolled so to speak?

[figmentofmyass]

Anyone else?  So if you get waves to your waves wallet from leasing or other wallets like that... but you don't sell them... do you report that?

now you're talking about staking rewards, which are distinct from airdrops. read this: https://tokentax.co/help/how-taxes-work-for-crypto-mining-and-staking/

If you mined bitcoin or other cryptocurrencies or received rewards from crypto staking, then you are liable for income tax on what you earned.

In the United States, per IRS guidance, crypto mining is to be treated as ordinary income using the total fair market value of the currency at the date of receipt. This means that mining proceeds are reported as income, not capital gains.

every payment you received from leasing waves is considered ordinary income, not capital gains. you're supposed to calculate the fair market value of every payment when it was received, then report them all as income. there are crypto tax softwares that can do this for you now, so you don't have to manually calculate the value of every single payment.

That also makes no sense because until you sell it... what if each one is worth 5 dollars and you got say 50 for the year so two fifty profit.  But you didn't sell them or anything or trade it but then later on it drops to 0... so you pay taxes on that two fifty... but then get screwed when its 0?  Because if you do report that, wouldnt you have to sell it immediately to not get freerolled so to speak?

if you're worried about getting screwed by volatility, then yeah, you might sell the waves as they come in to maintain the USD value.

you're screwed when it goes to 0 because you're still liable for the original income BUT when you sell for a loss you can also deduct those capital losses in the tax year you sold. as long as you don't have more than $3k in realized losses during any year, you can deduct all those losses so it all evens out.

[coolcoinz]

Anyone else?  So if you get waves to your waves wallet from leasing or other wallets like that... but you don't sell them... do you report that?  That also makes no sense because until you sell it... what if each one is worth 5 dollars and you got say 50 for the year so two fifty profit.  But you didn't sell them or anything or trade it but then later on it drops to 0... so you pay taxes on that two fifty... but then get screwed when its 0?  Because if you do report that, wouldnt you have to sell it immediately to not get freerolled so to speak?

I don't report anything anywhere, since there's basically no way to trace my coins to me until I actually decide to sell for fiat, but wait, I can sell for cash. Now, is there a way to trace coins bought and sold for cash back to me? I'd like to see them try For now I'm clean since I don't have to report unrealized gains and I also don't need to report realized gains until a certain amount.
If you're worried that it might drop to 0, maybe you shouldn't invest in the first place. You don't need to be a master of TA to know that it will nevr go to literal 0, but even if we think of something like $100, it would need years to drop that low. You'd have plenty of time to sell at 6k, 3k, 1k and all other strong levels.

[Findingnemo]

Anyone else?  So if you get waves to your waves wallet from leasing or other wallets like that... but you don't sell them... do you report that?  That also makes no sense because until you sell it... what if each one is worth 5 dollars and you got say 50 for the year so two fifty profit.  But you didn't sell them or anything or trade it but then later on it drops to 0... so you pay taxes on that two fifty... but then get screwed when its 0?  Because if you do report that, wouldnt you have to sell it immediately to not get freerolled so to speak?

I don't report anything anywhere, since there's basically no way to trace my coins to me until I actually decide to sell for fiat, but wait, I can sell for cash. Now, is there a way to trace coins bought and sold for cash back to me? I'd like to see them try For now I'm clean since I don't have to report unrealized gains and I also don't need to report realized gains until a certain amount.
If you're worried that it might drop to 0, maybe you shouldn't invest in the first place. You don't need to be a master of TA to know that it will nevr go to literal 0, but even if we think of something like $100, it would need years to drop that low. You'd have plenty of time to sell at 6k, 3k, 1k and all other strong levels.

I think he is not talking about the bitcoin so he may not have enough time to sell that shitcoin before going to zero!

OP can use p2p or decentralised exchanges for the conversion of that token into bitcoin or ethereum then sell it in peer to peer if you don't want to get traces but if the government made such rule then you can't deny it or else it will be tax evasion.

[jerry0]

Anyone else?  So if you get waves to your waves wallet from leasing or other wallets like that... but you don't sell them... do you report that?  That also makes no sense because until you sell it... what if each one is worth 5 dollars and you got say 50 for the year so two fifty profit.  But you didn't sell them or anything or trade it but then later on it drops to 0... so you pay taxes on that two fifty... but then get screwed when its 0?  Because if you do report that, wouldnt you have to sell it immediately to not get freerolled so to speak?

I don't report anything anywhere, since there's basically no way to trace my coins to me until I actually decide to sell for fiat, but wait, I can sell for cash. Now, is there a way to trace coins bought and sold for cash back to me? I'd like to see them try For now I'm clean since I don't have to report unrealized gains and I also don't need to report realized gains until a certain amount.
If you're worried that it might drop to 0, maybe you shouldn't invest in the first place. You don't need to be a master of TA to know that it will nevr go to literal 0, but even if we think of something like $100, it would need years to drop that low. You'd have plenty of time to sell at 6k, 3k, 1k and all other strong levels.

My example is different here.  Im talking about coins you get from staking... example... u get coins from waves leasing or any other altcoins.  But during the whole time, you just get additional waves or other altcoins.  Say you get a few hundred dollars worth of it when you add up each transaction at the time you receive those waves or altcoin...like 5 dollars each time...but obviously it could be more or less if that coin price is different.  Then say you reported one hundred or few hundred etc.  Then later on... that coin is worth nothing... then what happens?  Because i understand how it works when you buy coins and then it goes up a lot when you sell but then dont sell the other bunch and then it drops.. but when you get coins from staking.. it seems like you need to immediately sell it for usd or usdt to prevent getting screwed so to speak on something like this?  Obviously for small amounts it doesn't seem to be big deal... but it doesnt make sense because if that is how taxes work for staking... shouldnt almost everyone immediately sell it for usd/usdt the moment they receive them? 

[jerry0]

Anyone?

[figmentofmyass]

My example is different here.  Im talking about coins you get from staking... example... u get coins from waves leasing or any other altcoins.  But during the whole time, you just get additional waves or other altcoins.  Say you get a few hundred dollars worth of it when you add up each transaction at the time you receive those waves or altcoin...like 5 dollars each time...but obviously it could be more or less if that coin price is different.

Anyone?

i know you're really hoping to get a different answer, but all the tax experts say the same exact thing: based on the IRS's 2014 guidance, staking rewards are treated as gross income at the time of receipt.
https://tokentax.co/help/how-taxes-work-for-crypto-mining-and-staking/
https://cryptotrader.tax/blog/how-to-handle-cryptocurrency-mining-on-your-taxes
https://medium.com/@BlockchainAssoc/why-staking-rewards-need-better-tax-treatment-81ea4d542ebd

Then say you reported one hundred or few hundred etc.  Then later on... that coin is worth nothing... then what happens?

sell for a loss, then deduct the loss on schedule D (capital gains and losses). this will even everything out so you only owe taxes on your actual profit:

you're screwed when it goes to 0 because you're still liable for the original income BUT when you sell for a loss you can also deduct those capital losses in the tax year you sold. as long as you don't have more than $3k in realized losses during any year, you can deduct all those losses so it all evens out.

but when you get coins from staking.. it seems like you need to immediately sell it for usd or usdt to prevent getting screwed

yes, unless you have other ways to cover the tax liability, or ways to hedge the downside risk.....or you just want to gamble.

[jerry0]

What if you don't even know what was the price of that coin when you received it?  Example either that coin is now 0 or doesn't exist or very little but coinmarketcap doesn't show anything on it?

[Findingnemo]

Still, you can find the value of the token at the time you received it with the help of coinmarket cap's price graph.

But in my country there is no need of tax liability until I convert the funds into fiat.

[jerry0]

Still, you can find the value of the token at the time you received it with the help of coinmarket cap's price graph.

But in my country there is no need of tax liability until I convert the funds into fiat.

What if that coin is no longer there anymore?  Or it changed its name?

[jerry0]

This is insane. So what if someone has thousands of tons of transactions and has a few wallets that they stake.  Example, waves seem to every few days give you some coin... where you not even sure if these coins are legit or not.  Some of them I think are even scam coins.


I mean im sure there are some wallets that might give you tons of coins for staking but you dont have a clue how much its worth?  What if its not worth nothing?  Also if its worth pennies and you get them every few days, you going to record 50 transactions for the year the moment you sell them each time?


Example received staking coin p that was 5 cents... now you sell them three cents.  Then you do that for the next fifty transactions or something when you sell them a year later or something?  Someone could have ten thousand transactions easily if it was like this if they stake and get lot of staking coins that could be worth nothing.  This doesn't even make sense since it seems the only way it make sense is when you sell them... similar to like how the forked coins with bitcoin cash etc... right?   So if you have tons of coins like bcoin and l coin that you got from staking and received it multiples times throughout the year but you dont see it worth anything or worth a penny, you going to still have to report it?  I mean imagine it being worth a penny and you got that one hundred times a year.  When you sell it... you going to record the transaction one hundred times b/c you got it a hundred times?