Spark token airdrop comes with an unintended tax bill that recipients need to be aware of. People who hold XRP on certain exchanges as of December 12, 2020 are receiving an equivalent amount of Spark token via an airdrop. Spark is the native token of the Flare network.
Spark Airdrop Taxes
According to the IRS Rev. Rul. 2019-24, air dropped tokens are taxed as ordinary income when you gain dominion and control over it. In simple terms, this means at the time you receive them and you have the ability to transfer, exchange or sell the coin. The amount of ordinary income to be reported is the fair market value at the time you gain dominion and control. This amount would be subject to ordinary income taxes based on your income tax bracket.
For example, say you received 1 Spark token on December 12, 2020. On this day it’s worth $1. However, you don’t get any control over the coin until January 1, 2021. On this date, 1 Spark token is worth $3.
January 1st is the day you gain dominion and control of the asset. Therefore, you would have to report $3 of ordinary income in 2021 taxes. If you were to sell this in February for $5, you would have a capital gain of $2 ($5 – $3)
When Bitcoin cash fork occurred in 2017, the IRS did not have airdrop specific tax guidance. In the absence of this guidance, many taxpayers were confused as to how it should be taxed and reported. However, this time around the tax guidance around airdrops is much clearer. Therefore, reporting your Spark airdrop correctly is crucial to avoid any tax troubles.
Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional
