Background

Cryptocurrencies are treated as property for U.S. federal tax purposes (IRS Notice 2014-21). That classification drives how gifts, airdrops, and hard forks are taxed: transfers that simply move ownership (gifts) follow gift-tax and basis rules, while distributions of new tokens (airdrops and post-fork coins) are treated as receipts of property that can create taxable income when you obtain control (see IRS virtual-currency guidance).

Reporting rules — at a glance

  • Gifts: Giving cryptocurrency is a property gift. The donor may need to file Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return) if the gift exceeds the annual exclusion. Recipients do not report gifts as income when received, but they generally inherit the donor’s cost basis and holding period for later capital-gains calculations (carryover basis). See IRS gift-tax guidance for current exclusion amounts.

  • Airdrops and hard forks: When you receive tokens from an airdrop or from a hard fork, the tax position is typically ordinary income equal to the fair market value (FMV) of the tokens at the time you have “dominion and control” — meaning you can transfer, sell, or otherwise dispose of them. That income is reported on your Form 1040 (Schedule 1 “Other Income” or Schedule C if the activity rises to a trade/business). When you later sell or exchange those tokens, report gains or losses on Form 8949 and Schedule D using the appropriate cost basis (the FMV you reported as income).

Which forms to use

  • Form 1040: Report ordinary income from airdrops/forks on Schedule 1 (or Schedule C if self-employment income).
  • Form 8949 and Schedule D: Report capital gain or loss when you sell, exchange, or dispose of the token.
  • Form 709: Donor files this for reportable gifts above the annual exclusion (check current IRS limits).

(Authoritative starting points: IRS Notice 2014-21 and the IRS virtual currency page.)

Basis and holding period — practical notes

  • Airdrop/hard-fork basis: Your basis in tokens received equals the FMV you included in ordinary income when you obtained dominion and control. That FMV becomes the starting point for later capital-gains calculations.
  • Gift basis: Recipients generally take the donor’s basis (carryover basis). If the asset’s FMV is lower than the donor’s basis and the recipient later sells at a loss, special dual-basis rules can apply — get professional help for complex cases.

Recordkeeping checklist

  • Date and time you first had dominion and control of any airdrop/fork tokens and the FMV at that moment.
  • Records of who gave you a gift, the date, and the donor’s basis (if available).
  • Transaction history for purchases, transfers, sales, and wallet addresses that link the event to your account.
  • Any 1099s, exchange records, or contractual documents describing the airdrop/fork.

Real-world example

A client received an unsolicited airdrop worth about $3,000 on the date they could transfer the tokens. Because they had dominion and control, they should have reported $3,000 of ordinary income that year, then used that FMV as the cost basis when they later sold the tokens. Failing to report the income invited underpayment and possible interest and penalties.

Who is affected

  • Individual taxpayers who hold or receive cryptocurrency in wallets or exchange accounts.
  • Business owners who receive crypto as gifts or promotional tokens; such receipts may be ordinary business income if connected to business activity.

Common mistakes to avoid

  • Treating airdrops/forks as non-taxable gifts. If you can control and dispose of the new tokens, the receipt is typically taxable.
  • Failing to document the FMV at the exact moment you had control. Price volatility makes precise timestamps and sources essential.
  • Using the wrong form: ordinary income should not be omitted and later only reported as capital gain when sold.

Professional tips

  1. Valuation: Capture a time-stamped market price from a reliable exchange at the moment you gained control. If no liquid market exists, document your valuation approach.
  2. Segregate activities: If you receive frequent airdrops or token distributions, track them separately to avoid mixing cost bases.
  3. Consider professional help: Complex forks, exchange credits, or traded derivatives often require specialized tax analysis.

Interlinks (further reading on FinHelp.io)

Frequently asked questions

Q — When exactly do I owe tax on an airdrop or hard-forked token?
A — When you have dominion and control: the point you can transfer, sell, exchange, or otherwise dispose of the tokens. That is the date used to determine ordinary income and FMV.

Q — If someone gifts me Bitcoin, do I owe income tax when I receive it?
A — No; the recipient does not report a gift as income when received. However, the donor may have gift-tax reporting obligations and the recipient inherits the donor’s basis for future capital-gains calculations.

Q — What if I didn’t report an airdrop or fork in a prior year?
A — Consider amending the return for the year of receipt or consult a tax professional about voluntary disclosure options. Ignorance generally isn’t an adequate defense if the IRS discovers the omission.

Professional disclaimer

This article is educational only and not individualized tax advice. Rules for cryptocurrency taxation change and can be fact-specific. Consult a qualified tax professional or the IRS directly for guidance specific to your situation.

Authoritative sources