What is a cryptocurrency airdrop? All you need to know

Cryptocurrency airdrops are not new to the industry, but they are seen more and more frequently with the development of the NFT space.

In short, a cryptocurrency airdrop occurs when a network distributes its native token for free. They offer a method for blockchain networks to quickly develop their communities, as well as for cryptocurrency investors to get their hands on new tokens at either a cheap cost or completely free.

To partake in an airdrop, users and investors may have to acquire an existing coin and transfer it to an exchange or wallet. Certain airdrops might only be available to people who have signed up and linked their wallets. A cryptocurrency airdrop is essentially a way for a new coin to generate two things:

1. A market that will offer liquidity to a new token and its native platform, and
2. An ecosystem of holders who may utilise the token to interact with the platform.

A brief overview of crypto airdrops

In 2014, the first cryptocurrency airdrop in history occurred. Auroracoin was created as a national cryptocurrency accessible in Iceland. Using Iceland’s thorough national records, Auroracoin issued its native cryptocurrency $AUR to the entire Icelandic population, allocating half of the total coin supply to Icelandic people. Residents simply needed to register and they would earn 31.8 AUR. Auroracoin was the first cryptocurrency airdrop, however it fell short of its high objective of becoming the first national cryptocurrency.

Since Auroracoin, the industry has seen some significant airdrops. The Stellar Development Foundation (SDF) was established with the intention of distributing 19% of its original total supply of lumens (XLM), or 19 billion XLM, to Bitcoin holders. It started this process in 2016. Initially, the scheme was tested by distributing three billion XLM to BTC holders through several participating exchanges. The remaining 16 billion XLM were distributed in 2017 in accordance with the amount of BTC that customers possessed through various participating exchanges.

Giving out such enormous quantities for free drew extensive media attention, including from prominent news outlets outside the bitcoin field. Many news sites referred to the airdrops as some of the largest consumer freebies ever held.

Regulation around airdrops

In many parts of the world, the laws governing cryptocurrency airdrops are ambiguous. Some countries, most notably China, have outright prohibited them. Certain governments have restrictions on specific airdrops too. For example, the Morpher airdrop excluded citizens of the following countries:

Afghanistan, American Samoa, The Bahamas, Botswana, the Democratic People’s Republic of Korea, Ethiopia, Ghana, Guam, Iran, Iraq, Libya, Nigeria, Pakistan, Panama, Puerto Rico, Samoa, Saudi Arabia, Sri Lanka, Syria, and Yemen, Tunisia, the United States Virgin Islands, and Yemen.

Nations might ban airdrops for a variety of reasons, but the major reason citizens in the United States cannot participate is due to securities regulations. Airdropped tokens or tokens distributed as part of a crowd sale are likely to be regarded as unregistered securities by the Securities and Exchange Commission (SEC). As a result, anyone who organises an airdrop might face legal consequences.

When it comes to the legal approach to an airdrop,  participants should also keep in mind that many countries tax airdrop benefits as ordinary income.

How can I qualify for an airdrop?

There are several methods to be eligible for a crypto airdrop. The most popular is to keep a certain quantity of another coin in an approved wallet.

Holders of the OMG Network’s OMG token, for example, were eligible to participate in the Boba Network’s airdrop for BOBA in November 2021. If you owned OMG on a participating exchange (such as Binance, Crypto.com, Huobi, and many others), or if you moved OMG to a Boba Network address, you would earn BOBA in a 1:1 ratio.

Parties in this situation had to keep OMG in these spots during a ‘snapshot’ of the Ethereum blockchain (on which OMG and BOBA operate). They would earn an identical amount of BOBA one week later if they held OMG in qualified places at this snapshot.

Most other cryptocurrency airdrops follow a similar pattern, with the main theme typically being the requirement to keep a certain token at a specific location at a specific time.

Some airdrops, however, may be a little different. In 2021, for example, the airdrop for Morpher (MPH) needed merely the creation of a wallet and the completion of a know-your-customer (KYC) check, with no requirement to own another cryptocurrency. Other airdrops require you to post about a platform on various social media networks, and others coordinated by a specific exchange may need you to trade a particular quantity of a given token prior to the final time limit.

There are several locations where interested investors might check for forthcoming airdrops. These include airdrops.io, icomarks.com, airdropalert.com, and CoinMarketCap, which all provide lists of upcoming airdrops as well as information on how to participate.

Is it possible that I have earned airdrops that I have not claimed?

Given that a huge number of airdrops allow you to participate merely by holding a certain token with an approved exchange at the time of a snapshot, there’s a strong possibility you’ve won airdrops you haven’t yet claimed.

Check your exchange account to see whether you’ve earned any airdrops. For example, if you’ve heard there was an airdrop for BOBA, go to your exchange account, check the deposits page, and then check to see whether any BOBA has been placed into a BOBA address generated for you by the exchange.

Similarly, if you hear that an airdrop was available to anybody who had a certain third-party wallet, double-check that wallet. And, regardless of the specific circumstances, if you know you’ve met them, try to contact the persons engaged in the airdrop (be it an exchange or platform).

Is it customary to tax crypto airdrops?

Crypto airdrops are normally taxed in many countries that have begun to update their taxes rules or regulations to accommodate cryptocurrency.

Airdrops are taxed as ordinary income in the United States at the time of receipt. In other words, if you receive airdropped tokens that are worth $100 USD at the time of the airdrop, that $100 USD will be added to your taxable income.

Other countries approach airdropped tokens differently. Airdropped tokens, for example, are normally subject to capital gains tax in Canada and the United Kingdom, with the taxable value computed at the moment of disposal. So, if you obtain a token worth £100 GBP at the moment of receipt but subsequently sell it for £1000 GBP, your taxable gain will be increased by £900 GBP.