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Crypto Law/Level II · Tax: the first trap/2.2 Income from crypto/Lesson 3

Airdrops and hard forks

When free coins from a chain split or a token giveaway count as income under US tax law, why the date you could first move them matters, and where other countries differ.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. A hard fork that delivers no new coins creates no income under Rev. Rul. 2019-24, and holding the original coin through a fork is not a sale; nothing is reportable for that event.
  2. Fork coins your exchange credits later are income only when credited, following CCA 202114020’s reasoning, valued at that date; self-custody holders are treated as receiving them at the fork.
  3. Airdropped coins take a basis equal to the income reported; holding them more than one year makes later gains long-term, with the 2026 0% band up to $49,450 taxable income (single).
  4. For unsolicited tokens with no market, record arrival date and the absence of trading as evidence of value, since guidance does not say how to value unsellable tokens; avoid interacting with unknown contracts.
  5. UK residents: HMRC says airdrops received without doing anything, outside a trade, may escape Income Tax, with Capital Gains Tax and its £3,000 allowance on disposal; US citizens remain US-taxable wherever they live.

MaterialsIRS Revenue Ruling 2019-24 on hard forks and airdrops (irs.gov)IRS Chief Counsel Advice 202114020 on the 2017 Bitcoin Cash forkA block explorer or exchange record showing when an airdropped token reached your address and when you could first move it

Wonder

  1. If a coin I hold splits in two, do I owe tax on the new coin?
  2. Is a token that simply appears in my wallet income?
  3. What if my exchange would not let me touch the new coins for months?

Explore

  1. Two terms first. A hard fork, in the words of IRS Revenue Ruling 2019-24 (October 2019), is a permanent diversion from the existing distributed ledger; it may create a new cryptocurrency on a new ledger alongside the old one. An airdrop is a way of distributing units of a cryptocurrency to the ledger addresses of many people at once. A fork is not always followed by an airdrop: sometimes the new chain gives holders nothing. The ruling applies section 61 of the Internal Revenue Code, which taxes all accessions to wealth that are clearly realised and under the taxpayer’s complete dominion.
  2. The ruling sets out two situations. In the first, a holder owns 50 units of a coin that forks, but receives no units of the new coin: there is no income, because nothing new was received. In the second, a holder of 50 units receives 25 units of the new coin by airdrop, worth $50, and can dispose of them immediately: that is $50 of ordinary income in the year of receipt, and the holder’s basis in the new coins is $50 (lesson 2.3.1). Holding the original coin through the fork is not a sale of it (lesson 2.1.7).
  3. Timing turns on dominion and control, the ability to transfer, sell or exchange the coins. Rev. Rul. 2019-24 says a holder whose exchange does not support the new coin has not received it until the exchange credits it. IRS Chief Counsel Advice 202114020, released in April 2021, applied this to the Bitcoin Cash fork at block 478,558 on 1 August 2017. A holder controlling their own keys had income in 2017, valued at the time of the fork; an exchange customer had income only when the exchange enabled the coin. The memo notes that Coinbase began supporting Bitcoin Cash on 19 December 2017. Such advice is not precedent, but it shows the IRS’s reasoning.
  4. Many airdrops have nothing to do with forks. Projects reward early users, as Uniswap did on 16 September 2020 by letting each address that had used it before 1 September claim 400 UNI. The published rulings deal with airdrops that follow a hard fork; for other airdrops, the general section 61 principle applies, and the IRS digital-assets page lists receiving a reward or award among events that require a Yes on the Form 1040 question (lesson 2.3.4). Some questions have no published answer, such as whether a claimable airdrop is received when it becomes claimable or when it is claimed. Reward programmes tied to using a protocol are covered in lesson 2.2.7.
  5. Unsolicited tokens are a separate problem. Tokens sometimes appear in wallets uninvited, with no real market, and some are bait: interacting with them can lead to a malicious contract that drains a wallet (lesson 4.2.3). Published IRS guidance does not explain how to value a token that cannot actually be sold. A careful record notes that the token arrived, when, and what evidence of value existed at the time, such as whether any market traded it. If an airdropped token is later sold, the gain or loss is measured from the basis created when it was counted as income.
  6. Other jurisdictions draw the line differently. In the United Kingdom, HMRC’s Cryptoassets Manual (page CRYPTO21250) says Income Tax may not apply to airdropped tokens received without doing anything in return and not as part of a trade, but airdrops given in return for, or in expectation of, a service are taxable as income; either way, Capital Gains Tax may apply on disposal. A practical check: for each airdrop or fork coin you hold, write down the date it reached you, the date you could first move or sell it, the value on that date and the source of that value. This lesson explains the law; it is not tax advice.

Key facts

  • Rev. Rul. 2019-24 holds that a hard fork produces no gross income if the taxpayer receives no units of a new cryptocurrency.
  • Rev. Rul. 2019-24 holds that an airdrop of a new cryptocurrency following a hard fork produces ordinary income when the taxpayer receives units of it.
  • Under Rev. Rul. 2019-24 the income is the fair market value when the taxpayer gains dominion and control, and that amount becomes the taxpayer’s basis.
  • Chief Counsel Advice 202114020 concerns the Bitcoin Cash hard fork of 1 August 2017 and treats exchange customers as receiving the coin only when their exchange supported it.
  • Uniswap’s September 2020 airdrop let each address that had used the protocol before 1 September 2020 claim 400 UNI.
  • HMRC guidance says UK Income Tax may not apply to airdrops received without doing anything in return and not as part of a trade.

Exercise nine, six, three, one

9CollectList up to 9 airdrops or fork coins you have received or read about, including any you never claimed or never moved.
6ClusterSort them into 6 categories: coins from a hard fork, retroactive user airdrops, airdrops you had to claim, airdrops tied to a service or task, unsolicited tokens, and coins your exchange did not support at first.
3DistillReduce the 6 categories to 3 groups: income on arrival, income when control began later, and cases where the value or timing is unclear.
1CrystallizeWrite 1 sentence explaining why two people holding the same coin through a fork could report income in different tax years.

Fact check

Dates, figures and claims checked against the published sources listed below.

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