What Is a Crypto Airdrop and How Does It Work?

Cryptocurrency airdrops have become very popular on social media platforms. New airdrops are frequently announced, and people scramble for what they believe are lucrative deals.

Unfortunately, most of these airdrops don’t turn out as expected. Besides that, most people have little knowledge of what a crypto airdrop is and how it works.

Let’s change that.

What Is a Crypto Airdrop?

A cryptocurrency airdrop is when “free” cryptocurrency tokens are deposited into your wallet. Why would anyone deposit free tokens to your wallet, you ask? Well, some cryptocurrency projects use airdrop as a marketing strategy.

One of the factors determining a cryptocurrency’s value is how many people use it (along with other factors like usability, the technology, decentralization, and so on). So crypto projects can undertake this venture to get you to use their tokens and contribute to their growth.

Also, it’s not necessarily free. Depending on the type of airdrop, you might have to give out some personal information or prove ownership of base tokens to qualify for a crypto airdrop. Well, get into that in a minute.

How Does a Crypto Airdrop Work?

Crypto airdrops are a novel tactic used by crypto projects to raise awareness. Despite its cost, which could run into hundreds of millions of dollars, especially when guaranteeing liquidity, like Worldcoin’s airdrop, it’s a favorite strategy for crypto companies because it works.

People love free money. So when free tokens—with the potential to exponentially increase in value—are promised to the public, you bet many people will scramble for them. With this single tactic, the project can create a lot of excitement around it, and as a result, the value gained from public interest supersedes the cost of giving out free tokens.

Besides marketing, crypto airdrops are used as a decentralization strategy. People support cryptocurrencies because no single entity or government has control over them. So to attain more decentralization, crypto projects will conduct airdrops.

As people join the community, own part of the tokens, and contribute to the project, the cryptocurrency becomes more distributed. A bigger community means more contributors, which extends to achieving better security and regulatory protection.

Crypto airdrops are usually announced in online cryptocurrency forums and social media channels. To participate, you must be proactive in these online communities, looking out for new airdrop opportunities. However, you must also be vigilant to spot crypto airdrop scams. Once you identify a legitimate crypto airdrop, check whether you meet the requirements to qualify for the airdrop. Requirements often include:

1. Have a compatible cryptocurrency wallet where the tokens will be sent.
2. Have base cryptocurrencies. A base cryptocurrency in this context is an already established token used as the basis of the new token being airdropped. For instance, if a token is based on a fork of the Ethereum blockchain, you might need ETH to qualify.
3. Meet some of the criteria in the project’s ecosystem. For instance, one criterion for Arbitrum’s Airdrop on 23rd March 2023 included completing $10,000 worth of transactions in the Arbitrum Network.

Remember, the criteria for qualification depend on the projects. So if you meet all the requirements, you can connect your wallet and receive your airdrops.

Types of Crypto Airdrops

Crypto airdrops can serve various purposes, from promoting new projects to drumming up support for existing projects. As such, they can be classified into these types:

• Standard Airdrop: This is the most common type of airdrop. It involves a project distributing free tokens on a first-come-first-served basis. Typically, participants would be asked to sign up on a platform to qualify for the airdrop. The BAT rewards by Brave, where anyone who downloads and uses the Brave web browser is eligible for random crypto rewards every 30 days, is an example of a standard airdrop.
• Hard Fork Airdrop: A hard fork happens when a project breaks from the original protocol and changes the code, making the new protocol incompatible with the original protocol. In such a case, the participants of the new chain are airdropped new coins equivalent to what they had in the previous chain. For instance, Bitcoin Cash airdropped BCH to anyone who held Bitcoin at the time of its hard fork from Bitcoin.

• Bounty Airdrop: Crypto projects often try to sustain participation through bounty airdrops. For instance, they’d ask participants to perform specific actions such as following the project on social media or referring friends in exchange for free airdrops. Bounty airdrops are very popular among NFT projects.
• Holder Airdrop: In a holder airdrop, a project takes a snapshot of the blockchain at a specific time, capturing the tokens in user wallets. Then anyone holding a specified number of tokens at that time becomes eligible for an airdrop. A good example is the ApeCoin airdrop, where tokens were sent to owners of BAYC NFTs.
• Raffle Airdrop: When a project wants to encourage participation in the community, they could announce a fixed number of rewards to be distributed for activities such as holding tokens or transacting. Occasionally, those who meet the requirements for winning would exceed the allocated tokens. In this case, the project uses a lottery mechanism to pick the winners.
• Exclusive Airdrop: Every project has strong supporters who are active or stick around for a long time. They don’t necessarily have many tokens, but they’ve demonstrated their unwavering support in the community forums. The project could recognize such people and reward them with an exclusive airdrop.

Arguably, these airdrop types are not exclusive of each other. Some crypto airdrops could fall into two categories depending on the reasons behind them.

How Are Crypto Airdrops Taxed?

In general, crypto transactions are considered taxable events. From selling digital assets for cash, using crypto for payments, or receiving airdropped tokens, all these transactions are liable for tax, depending on the jurisdiction of the token owner’s location.

In the US, proceeds of mining, staking, crypto payments, and airdrops are considered income and thus should be reported when filing tax returns. As Taxbit elaborates, you’ll need Form 8949, which is used to keep track of capital gains and losses for digital assets. Cryptocurrency exchange platforms additionally issue users three types of Forms 1099 to file their returns.

You’ll be taxed on any capital gains from your cryptocurrency transactions, and the percentage depends on various factors, such as the value of assets and the holding period. Longer-term assets are taxed more fairly than short-term assets.

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Determining capital gains and losses can be challenging, considering that tokens earned from an airdrop may not be liquid or have a quantifiable market value. Also, airdrops are not taxable unless an individual has received the token and can trade it.

Cryptocurrency tax regulations can be complicated. You should consult tax professionals familiar with cryptocurrency taxation legislation in your jurisdiction to ensure you’re not breaking any law.

Explore Crypto Airdrop Opportunities Cautiously

It’s good to be more careful and methodical when taking on crypto airdrop opportunities. Researching the project behind an airdrop might cost time, but it’s worth every second. While airdrops have made many legitimate crypto projects soar to success, they’ve also been perfect tools for scammers to defraud people online. In addition, always keep a proper account of your crypto airdrop investments to avoid clashing with the taxman.