Phantom Tax Consequences on Receipt of Digital Assets by Airdrop

By Josh Lawler on ALTCOIN MAGAZINE

On October 9th, 2019, the IRS released long-awaited guidance on the taxation of cryptocurrency through Rev. Ruling 2019–24 and an associated FAQ, including their guidance on the treatment of airdrops. The IRS takes the controversial position that the airdrop equates for taxation purposes to a dividend. As a corollary, an involuntary (and perhaps unknowing) recipient of an airdropped token would have a taxable event.

Moreover, the value ascribed to the airdropped token (on which the recipient pays tax) would almost certainly be well in excess of the amount for which the recipient could sell the token. We call this “phantom tax”, a situation in which a taxpayer must pay tax without having corresponding liquid income to fund such payment. That is bad.

This article will discuss:

1) the IRS’ position on hard forks (one source of airdropped tokens);

2) the potential to manipulate the IRS’ dominion and control requirement for receiving an airdrop; and