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The taxation of $APE and other "Airdrops"



What is an Airdrop?

According to this revenue ruling from the IRS an airdrop is:

"a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers."

So what are some examples of an airdrop? Most famously, we have the mutant serums. Those were an airdrop. All those scam NFTs that appear in your hidden folder? Those are airdrops too, and we know that airdrops are taxed as ordinary income as a result of receiving an airdrop, but what about $APE? $ENS? $LOOKS? Are those airdrops too?


Unpopular Opinion

If $APE was an airdrop, and you claimed 10,000 $APE, when the value of $APE was $15.00, congratulations, you just realized $150,000 of ordinary income. This is the stance that many "cryptoaccountants" are taking, and it's what many people believe is the correct treatment of this type of event, but us here at WAGMI.Tax, we disagree. Although we refer to $APE, $ENS, and $LOOKS, as airdrops, by definition, they weren't. You had to claim them. You had to pay a gas fee to receive them, and some people, even if they were able to claim, didn't. So are those airdrops? No. I would argue they're more like free mints, where the gas paid is your basis in the token.


Diamond Hands Rejoice, Paper Hands Get Rekt

Under this assumption, if you claimed your $APE, and held it all the way, you don't have any income to report (yet), but if you swapped out to another token, used $APE to mint Otherdeeds, or transacted in any way, you're going to have to realize a pretty large gain on the amount you transacted with. Let's look at two examples.




Example 1: The Diamond Hand

You claimed 10,000 $APE and paid a gas

fee of 0.01 ETH (worth $5.00). You have a basis of $0.0005 per $APE. You're still holding all 10,000 $APE. You don't have to report any income, ordinary or capital.




Example 2: The Paper Hand

You claimed 10,000 $APE and paid a gas fee of 0.01 ETH (worth $5.00). You have a basis of $0.0005 per $APE. You swapped 5,000 APE to ETH immediately. At the time, the ETH you received was worth $60,000. Your basis in 5,000 $APE is $2.50, so you have a recognized short term capital gain of $59,997.50.



Staking

Staking is not a disposal, or sale, or exchange, so any $APE you stake does not create a taxable event, and when you withdraw your principal, it maintains the same basis, however, the $APE you earn IS ordinary income at the value you receive it. So if you're earning 10 $APE per day, at $5 per $APE, you need to report $50 per day of "interest income." So if you're worried about triggering large capital gains from staking, don't but make sure you're setting some fiat aside to pay Uncle Sam for the amounts you earn.

 

If you need help calculating your cryptocurrency gains/losses and filing your tax return, schedule a free 30 minute consultation today with an expert. #WAGMI



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