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February 12, 2022

What are Crypto Airdrops?

Crypto airdrops sound pretty good on the surface, you get free cryptocurrency dropped into your wallet as part of an initial offering from a new cryptocurrency. However, this high-level understanding of crypto airdrops misses some of the nuances of the technology.

If you receive a crypto airdrop, you're receiving a transfer of free cryptocurrency from a crypto project into your own wallet. But why would someone give away free money – or at least, free digital currency?

There are a few different situations where this can be beneficial for all involved. Airdrops are often rewards either for early investment in a project or a reward for executing a simple task. Oftentimes airdrops are utilized to entice users of a particular cryptocurrency to undergo identity verification, or KYC verification (Know your customer) in order to ensure the security and legality of a particular blockchain or digital currency project.

You might also get a crypto airdrop from signing up for something, like following the project on different media channels to help them gain traction or to register for their newsletter. From these initial examples, you might start to be connotating the term "airdrop" to simply a reward, and you wouldn't be wrong, but airdrops can also be used in a process known as governance. Airdrops are often used to airdrop governance tokens to users, which while they do have some monetary value, their purpose is greater than just cash - err crypto - in the bank.

Governance tokens give the holders voting rights and particular influence in the decisions of a particular cryptocurrency or digital currency project. In an effort to bridge the gap between the nuances of crypto and the traditional finance world, governance tokens might be compared, in some terms, to owning common stock in a company that holds voting rights.

Airdrops all around seem like a pretty good thing, but are there negatives to the process?

What are the downsides to crypto airdrops?

Crypto airdrops are a fantastic way to get "free" cryptocurrency, but there's the potential that the rewards you get from airdrops end up worth absolutely nothing. As comes with new cryptocurrency projects, there's a decent amount of risk involved in investing in them, much like investing in IPOs or startups in the traditional financial realm.

While airdrops don't inherently present a risk of losing any of your own money if the currency is of no value, considering they were "dropped" for free in the first place, there are more significant risks, particularly if the airdrop was a reward for handing over your personal information as part of an identity verification process.

In general, airdrops should likely only be pursued by astute cryptocurrency investors that are willing to put in the due diligence to make sure that the underlying project they support is trustworthy, and offers little to no risk to you, the recipient of the airdrop.

In many senses, cryptocurrency is still the wild west and due to the lack of regulation, it means that if you do choose to get involved in new projects, it's up to you to make sure to do your own due diligence on the security of a particular transaction.

There are, of course, different kinds of airdrops.

The different types of airdrops

There are standard airdrops, which transfer an amount of a coin into existing wallets as a way to market the project or token.

Then there's bounty airdrops, another type of marketing for a project, where recipients generally are required to engage in some form of promotional or marketing activity in order to receive it. In other words, a bounty for doing some form of activity, which could be as simple as just sharing a link on social media.

Exclusive airdrops are utilized to send cryptocurrency to people that follow crypto aggregators, which are essentially sites that aggregate crypto data into one centralized location.

Finally, there are holder airdrops, which provide airdropped crypto to people who currently have the cryptocurrency in their wallets. The biggest example of this is when Stellar, a cryptocurrency project that launched in 2014, airdropped nearly 20 billion work of XLM, Lumen, to holders of bitcoin. Users had to simply verify their bitcoin ownership to get their XLM. In doing this, Stellar's more widely known.

How do you learn more about airdrops?

If airdrops sound like something that you might be interested in participating in the future, you'll generally want to be on the lookout for new airdrops announced by either new or existing digital currency projects. Setting up Google alerts or just staying on top of the latest news is a great way to get involved. If you do this though, do be sure to keep on the lookout for scams or malicious behavior in the space. If you fall victim to a crypto scam, there's often no path of recourse.

So, if you do participate in airdrops, it's a way of getting free money or rewards - but what about taxes?

How do crypto airdrop taxes work?

If you are the recipient of a digital currency or reward through an airdrop, generally speaking, the taxman will want a cut of your "earnings." Not to mention that if you sell, trade, or dispose of your asset at a future date, you'll likely be subject to short-term or long-term capital gains on any increases of the value. You'll always want to make sure to evaluate your particular tax situation on an individual basis, but crypto taxes present a befuddling number of confusing rabbit holes that make it a tricky space still for tax professionals and individuals alike.

This is why utilizing a crypto tax software and current-year planning software is one of the best decisions you can make in the process. Luckily, Ledgible offers consumer and professional-grade (for CPAs and tax professionals) crypto tax and accounting software that automatically calculates gains and losses, cost basis, and generates all of the necessary forms you will need to properly file taxes.

If you're interested in getting started with Ledgible, you can register here. 

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