What Happens When You Get Free Crypto
You wake up one morning and see 50 new tokens in your wallet. No purchase. No trade. Just free crypto. That’s an airdrop. Or maybe your Ethereum wallet suddenly has new ETH Classic coins after a hard fork. Sounds like a gift, right? Think again. The IRS treats these as taxable income - and you’re legally required to report them.
Starting in 2025, the IRS is cracking down hard. If you received any crypto through an airdrop or fork and didn’t report it, you’re at risk. The agency now has tools to track wallet activity with over 92% accuracy. And they’re auditing more crypto users than ever. In 2024, crypto-related audits jumped 23% compared to the year before. This isn’t about big investors. It’s about everyday people who got a few hundred dollars in free tokens and thought, "It’s just free money."
Why the IRS Says It’s Income
The IRS doesn’t care if you didn’t ask for the tokens. They care that you now control them. According to IRS Notice 2014-21 and later guidance, when you gain "dominion and control" over new crypto - meaning you can send it, sell it, or trade it - it becomes taxable income. That’s true whether it’s airdropped by a new project, handed out after a blockchain fork, or even dropped into your wallet because you held Bitcoin during a Bitcoin Cash split.
Here’s the key: fair market value at the moment you control the tokens is what you owe taxes on. Not when you sell it. Not when you cash out. Right then. If you got 100 ARB tokens on March 23, 2023, and CoinGecko shows they were worth $1.47 each that day, your taxable income is $147. That’s it. You don’t get to wait until you sell them to pay taxes. The IRS sees this as ordinary income, just like a bonus or freelance payment.
How to Calculate Your Taxable Amount
You need two things: the exact date and time the tokens appeared in your wallet, and the USD value at that exact moment.
- Date and time: Check your wallet history. Most wallets like MetaMask or Trust Wallet show transaction timestamps. If you used a hardware wallet, sync it with your software wallet to see the full record.
- Value: Use a reputable price source like CoinGecko, CoinMarketCap, or a decentralized exchange (DEX) like Uniswap. Don’t guess. Don’t use the price from a week later. Use the price from the minute the tokens showed up. For example, if your tokens arrived at 3:14 AM UTC, pull the price from CoinGecko’s historical data at that exact time.
Some tokens don’t trade right away. Maybe they’re locked for 30 days. That doesn’t matter. The IRS says income is recognized when you can control it - not when you can sell it. So if you got 200 STARK tokens on January 5, 2024, and they were worth $0.80 each that day, your income is $160, even if you couldn’t trade them until March.
Gas fees you paid to claim the airdrop? You can subtract those from your cost basis later when you sell. But they don’t reduce your taxable income now.
Where to Report It on Your Tax Return
For the 2025 tax year, you report airdrop and fork income on Form 1040, Schedule 1, under "Other Income." Write "Airdrop Income" next to the amount. Don’t lump it under "Miscellaneous Income" - be specific. The IRS wants to see it clearly.
When you eventually sell those tokens, you report capital gains or losses on Form 8949. Your cost basis is the fair market value you already reported as income. So if you paid $147 in taxes on 100 ARB tokens and later sold them for $300, your capital gain is $153 ($300 - $147). If you held them over a year, you pay long-term capital gains tax (0%, 15%, or 20%). If you sold within a year, it’s taxed as ordinary income again - up to 37%.
Starting January 1, 2025, exchanges like Coinbase and Kraken must report sales and trades on a new form: Form 1099-DA. But here’s the catch: if you got airdrops directly into a non-custodial wallet (like MetaMask), the exchange won’t know about it. That means the IRS won’t get a report from them. So if you don’t report it yourself, they’ll find out later - and you’ll owe penalties.
What You Must Keep as Records
The IRS doesn’t just want your tax return. They want proof. And if you’re audited, you’ll need to show them:
- The exact date and time the tokens arrived
- The wallet address that received them
- The transaction hash (you can find this on Etherscan or similar block explorers)
- The USD value at receipt, with a link to the price source (e.g., CoinGecko timestamped screenshot)
- How you calculated the cost basis for future sales
Many people use spreadsheets. A simple one with columns for Date, Token, Quantity, FMV Source, Wallet Address, and Notes works fine. Some tax tools like Koinly and CoinTracking let you tag deposits as "airdrop" and auto-fill the value. One user on Capterra said Koinly saved them 14 hours on Optimism and Starknet airdrops alone.
Don’t rely on screenshots from your phone. Use a desktop browser to pull historical data with timestamps. And save your records for at least seven years. The IRS can audit crypto returns for up to six years if they suspect underreporting.
Common Mistakes (And How to Avoid Them)
Most people who get caught don’t mean to cheat. They just don’t know how.
- Ignoring small airdrops: One Reddit user ignored five airdrops totaling $327 in 2023. When the IRS caught up, they owed $872 in back taxes plus $128 in penalties. Small doesn’t mean exempt.
- Using the wrong price: Don’t use the price on Binance if the token didn’t list there until a week later. Use the first exchange where it traded.
- Forgetting forks: If you held Bitcoin before the Bitcoin Cash fork in 2017, you got BCH. That was taxable income. Same with Ethereum and Ethereum Classic. If you still hold those tokens, you owe taxes on their value at fork time.
- Thinking "no action = no tax": The IRS clarified in March 2025 that even if you didn’t do anything - no claiming, no clicking - if the tokens appeared in your wallet, you owe tax.
And don’t assume your tax software will catch it. TurboTax and H&R Block don’t auto-detect airdrops. You have to enter them manually.
What About NFTs and Utility Tokens?
The IRS guidance talks mostly about Bitcoin and Ethereum. But tax professionals agree: the same rules apply to NFTs and utility tokens. If you got a free NFT from a project’s airdrop, and you can transfer it or sell it, it’s taxable income. The value is the market price at receipt. The same goes for tokens that give you voting rights or access to a platform.
Some projects try to argue their tokens are "not property" or "not income." The IRS doesn’t buy it. In February 2025, the SEC fined Parallel Finance for an unregistered securities airdrop - proving regulators are watching. Even if the token has no clear value now, if it ever becomes tradable, you still owe tax on its value at receipt.
What’s Changing in 2025 and Beyond
The rules aren’t getting easier. They’re getting tighter.
By January 2026, more platforms - including decentralized exchanges and some wallet providers - will be required to issue Form 1099-DA. This form will report acquisition dates, cost basis, and proceeds from sales. But again, it won’t cover non-custodial wallets. That means the IRS is relying on you to self-report.
Deloitte predicts a 47% increase in reporting compliance for 2025 tax returns because of this. The IRS is also integrating blockchain analytics directly into its systems. By late 2025, they’ll be able to automatically flag wallets that received tokens but didn’t report them.
And it’s not just federal. 17 states now include crypto airdrops in state income tax calculations. Florida doesn’t - but if you moved from California or New York, your old state might still come after you.
What to Do Now
If you’ve received airdrops or forks and haven’t reported them:
- Collect all wallet addresses you’ve used since 2017.
- Use a blockchain explorer (Etherscan, Blockchain.com, etc.) to find all incoming transactions.
- For each airdrop or fork, note the date, token, quantity, and FMV using CoinGecko or CoinMarketCap.
- Calculate your total income from these events.
- Amend past tax returns (Form 1040-X) for years 2021, 2022, 2023, and 2024 if needed.
If you’re unsure, hire a crypto-savvy CPA. They charge $150-$350/hour, but a single audit could cost you thousands in penalties. The average case takes 2.3 hours - less than the cost of one bad tax mistake.
Final Thought
Free crypto isn’t free. It’s a tax event. The IRS isn’t trying to punish you. They’re trying to make sure everyone pays their share - just like with wages, tips, or freelance gigs. The tools to track you are here. The rules are clear. The only question left is: are you ready to get it right before they come knocking?
Do I have to report airdrops even if I didn’t sell them?
Yes. The IRS considers receiving airdrops and forks as taxable income the moment you gain control of the tokens - not when you sell them. You must report the fair market value in USD at the time you received them on Form 1040 Schedule 1 as "Other Income."
What if the token has no market value when I receive it?
Even if the token isn’t trading yet, you still owe tax on its value at receipt. The IRS requires you to use the best available evidence - like a DEX pool price, early exchange listing, or estimated value from the project’s whitepaper. If no value exists, document your research and reasoning. You may need to adjust later if the token starts trading.
Can I deduct gas fees from my airdrop income?
No, you can’t deduct gas fees from your airdrop income. However, you can subtract them from your cost basis when you eventually sell the tokens. For example, if you paid $15 in gas to claim 100 tokens worth $100, your cost basis becomes $115 ($100 income + $15 gas), reducing your capital gain when you sell.
Do I need to report forks the same way as airdrops?
Yes. Forks that give you new tokens (like Bitcoin Cash from Bitcoin) are treated the same as airdrops. You owe income tax on the fair market value of the new tokens at the moment you can control them - not when you first see them in your wallet, but when you can move them.
What happens if I don’t report my airdrops?
The IRS can audit you for up to six years. Penalties include 20% of the underpaid tax for negligence, 75% for fraud, plus interest. In 2024, the IRS audited 23% more crypto taxpayers for unreported airdrops than in 2023. With new blockchain tracking tools, it’s becoming harder to hide.