December 21, 2021 In Airdrop

Do I Pay Tax on a Scam Airdrop?

Reading Time: 2 minutes

  • Many crypto users have, knowingly or unknowingly, received a scam airdrop in their time
  • Sometimes a scam airdrop can be a dusting attack or just a marketing attempt
  • You are duty bound to pay tax on a scam airdrop, but how much you pay is up to you

Crypto airdrops can be a blessing or a curse. Some airdrops can become immensely valuable, whereas others are just ‘dusting’ attacks designed to prepare the way for a bigger attack on your wallet. The unfortunate thing is however that you still need to pay tax on your airdrop regardless of whether it is a legitimate airdrop or a scam airdrop. The good news is however that with a few minutes research you can avoid a nasty surprise come tax time.

Airdrops Count as Income

In the U.S., airdrops are considered other income and the value of them should be reported as such on Form 1040 Schedule 1. When it comes to paying tax on a scam airdrop, this is where things can get a little tricky. The IRS states that Fair Market Value (FMV) should be used to calculate the value of the airdrop, which isn’t always what your wallet tells you it’s worth.

Using the UNI airdrop as an example, the value at the time it arrived into your wallet is a fair reflection of the FMV because the exchanges selling it had good liquidity, so the value at the time of arrival would likely have been realised if it had been sold immediately after arriving.

With a scam airdrop however, there are no guarantees of this. For example, the Minerium scam airdrop did the rounds on Binance Smart Chain earlier this year and involved what looked to be tens of thousands of dollars’ worth of MNEB tokens arriving in BSC accounts.

Technically this should be reported as income, but if you were to have tried to sell the MNEB you would have not received anything like the purported value because the whole thing was a scam airdrop and the liquidity was non-existent. You would also have had to pay to ‘unlock’ the tokens, further raising the question of if it was even an airdrop at all.

Prove What Your Scam Airdrop is Actually Worth

Clearly it’s not fair to have to pay income tax on what your wallet says is worth $10,000 if the airdrop itself can only be redeemed for $10 (after a fee that could be worth more than this), and the IRS recognizes this. This is where a little research comes in.

If you can prove that the liquidity for your scam airdrop was so low at the time of receipt, either using exchange data or other proof that it was a scam of some sort, then the IRS should have no basis to say that the tokens you received through your scam airdrop were worth that much money.

Naturally, the more proof you can provide for this the better you will help your cause, although obviously this isn’t always easy. This is why it’s worth checking your wallets now and again to see what has come in and find a way of being able to prove that a scam airdrop that says it’s worth $10,000 doesn’t land you with a tax bill to match.

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