Airdrop
Definition
A distribution of free cryptocurrency tokens to wallet addresses, typically used by projects to reward early users, distribute governance tokens, or generate awareness.
Airdrops distribute free tokens to users who meet certain criteria — usually having used a protocol before a specific date, holding certain tokens, or participating in the ecosystem. Major airdrops like Uniswap (UNI), Ethereum Name Service (ENS), and Arbitrum (ARB) have distributed thousands of dollars worth of tokens to qualifying users.
Projects use airdrops for several strategic purposes: decentralizing token ownership (spreading governance power), rewarding early adopters who took risk on unproven protocols, generating buzz and user acquisition, and establishing a broad base of stakeholders who are invested in the protocol's success.
The "airdrop farming" phenomenon emerged as users began deliberately interacting with protocols they expected to airdrop tokens. Strategies include using decentralized exchanges, bridging assets to new chains, providing liquidity, and interacting with multiple features. Projects have responded with "Sybil detection" — identifying and excluding users who create many wallets to multiply airdrop rewards.
Tax treatment of airdrops is important and often overlooked. In the US, airdrops are treated as ordinary income at the fair market value when received. If you receive 1,000 tokens worth $5 each, you have $5,000 of taxable income, regardless of whether you sell. The cost basis for future capital gains is the value at the time of receipt.
Not all airdrops are legitimate. Scam airdrops — unsolicited tokens appearing in your wallet — can be bait for phishing attacks. Interacting with scam tokens (trying to sell them) can drain your wallet through malicious smart contracts. The rule is: if you didn't expect an airdrop, don't interact with unknown tokens.
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Frequently Asked Questions
How do I qualify for crypto airdrops?
Use new protocols and blockchains organically — swap tokens on decentralized exchanges, bridge to new networks, provide liquidity, participate in governance. Focus on protocols that haven't launched a token yet. There's no guarantee of an airdrop, so only use protocols you'd use anyway.
Are airdrops taxable?
Yes. In the US, airdrops are ordinary income at fair market value when received. You owe income tax even if you don't sell the tokens. If you later sell the tokens, any price change from the airdrop value is a capital gain or loss. Keep records of the value at the time of receipt.