A cryptocurrency airdrop is when a platform gives away its native token for free. Such airdrops have been going on for years, and they represent a way for blockchain platforms to grow their communities quickly, and for cryptocurrency investors to get their hands on new tokens at a very low (or non-existent) cost.
To participate in an airdrop, users and investors may need to purchase a pre-existing cryptocurrency and deposit it with an exchange or wallet. Some airdrops may be open to people who simply sign up or connect their wallet.
The laws surrounding cryptocurrency airdrops remain vague in many parts of the world, although some countries – most notably China – have banned them outright. At the same time, participants in airdrops should remember that many nations tax airdrop gains as normal income.
What is an Airdrop?
A cryptocurrency airdrop involves a platform depositing a (new) token into the wallets of participants.
It’s as simple as that. However, airdrops should be distinguished from hard forks. While hard forks also usually result in holders receiving a new cryptocurrency, they occur only when a blockchain splits into two competing chains, usually as a result of some controversy over how to update its protocol. By contrast, an airdrop doesn’t involve a hard fork.
A cryptocurrency airdrop is basically a means of creating two things for a new coin:
- 1) a market, which will provide a new token – and its native platform – with liquidity; and
- 2) an ecosystem of holders, who may use the token in order to interact with its platform.
Either way, the platform conducting the airdrop stands to gain from it, even if it might seem like it’s giving stuff away for free. At the same time, participants receive an asset that could increase in value over time.
How Do I Qualify for an Airdrop?
There are various ways to qualify for a cryptocurrency airdrop. The most common involves holding a minimum amount of another cryptocurrency in an eligible wallet.
For example, in November 2021, holders of the OMG Network’s OMG token were able to participate in the Boba Network’s airdrop for BOBA. If you held OMG with a participating exchange (including Binance, Crypto.com, Huobi and numerous others), or if you transferred OMG to an address on the Boba Network, you would receive BOBA on a 1:1 basis.
In this case, participants needed to hold OMG in these locations during the time of a ‘snapshot’ of the Ethereum blockchain (on which OMG and BOBA operate). If they held OMG in eligible locations during this snapshot, they would then receive an equal amount of BOBA one week later.
Most other cryptocurrency airdrops run along similar lines, with the need to hold a particular token in a particular place at a particular time usually being the key theme. However, some airdrops can be a little different.
To take another example from 2021, the airdrop for Morpher (MPH) involved only creating a wallet and completing a know-your-customer (KYC) check, with the holding of another cryptocurrency not required. Other airdrops involve posting about a platform on various social media platforms, while those organized by certain exchange may ask you to trade a certain amount of a certain token before a deadline.
There are a number of places where curious investors can visit to check upcoming airdrops. These include airdrops.io, icomarks.com, airdropalert.com and CoinMarketCap, all of which offer lists of future airdrops and details on how you can get involved.
Is There a Chance I’ve Earned Airdrops I Haven’t Claimed?
Given that a large number of airdrops let you participate simply by virtue of holding a particular token with an eligible exchange at the time of a snapshot, there’s a very good chance you may have earned airdrops you haven’t yet claimed.
If you’ve potentially earned airdrops through an exchange, check your account with it. For instance, if you’ve heard there has been an airdrop for BOBA, go to your exchange account, check the deposits page, and see if any BOBA has been deposited into a BOBA address the exchange may have created for you.
Likewise, if you hear that an airdrop was open to anyone who held a particular third-party wallet, check that wallet. And regardless of the particular conditions, if you know that you’ve fulfilled them, try to contact the parties involved in running the airdrop (be it an exchange or platform).
Do Any Countries Restrict Airdrops?
Yes, some countries do tend to restrict cryptocurrency airdrops. As an example, the aforementioned Morpher airdrop excluded anyone from the following nations:
United States, Afghanistan, American Samoa, The Bahamas, Botswana, Democratic People’s Republic of Korea, Ethiopia, Ghana, Guam, Iran, Iraq, Libya, Nigeria, Pakistan, Panama, Puerto Rico, Samoa, Saudi Arabia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia, US Virgin Islands, Yemen
Nations restrict airdrops for various reasons, but in the United States the main reason why residents can’t participate in them is because of securities laws. Effectively, airdropped tokens or tokens sold as part of a crowd sale are likely to be viewed by the Securities and Exchange Commission (SEC) as unregistered securities. This would therefore open anyone who organized an airdrop to legal action.
While the United States hasn’t banned airdrops, other nations have, with China being the most obvious example. As such, anyone caught participating in an airdrop in such a country runs the risk of prosecution.
Are Airdrops Usually Taxed?
In many nations which have begun updating their taxation laws or regulations to account for cryptocurrency, airdrops generally are taxed.
In the United States, airdrops are taxable at the time of receipt as ordinary income. In other words, if you receive airdropped tokens that, at the time of the airdrop, are worth $100, then this $100 will be added to your taxable income.
Other nations take a different approach to airdropped tokens. In Canada and the United Kingdom, for instance, airdropped tokens are usually subject to capital gains tax, with the taxable amount calculated at time of disposal. So if you receive a token that was initially worth £100 at time of receipt, but then you sell it later for £1000, £900 will be added to your taxable gain.
In sum, you are likely liable for some form of tax if you receive an airdrop. So check with your local or national tax authority for more details, or with a qualified tax expert.
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