Airdrop income estimated taxes

[Twostates]

What happens if the airdrop received in January drops in value by 80% and is sold at a loss or not sold at all.

is the quarterly estimated tax due on the income amount of the airdrop when received and first payment due April 18th ?

 if so where does that actual money come from if the value dropped?

That means the effective tax rate is like 70%

[HelenC12]

@Twostates  

Please read the following information and if you have additional questions, please post them in a new thread.

Recently, the IRS ruled that airdrops, along with promos and staking rewards, only become taxable once the taxpayer "acquires the ability to transfer, sell, exchange, or otherwise dispose of the cryptocurrency." If you had one of these taxable transactions in the first quarter, you should pay estimated taxes, on the gain, unless you have enough withheld from your W-2 job (if you're working) to offset any taxes you need to pay on the taxable airdrop transaction at the end of the year.

•  Airdropped currency that's not yet usable or accessible would therefore not be taxable until the taxpayer can exercise control over it.

Cryptocurrency airdrops are (usually) free distributions of coins or tokens into multiple wallet addresses to promote and drive adoption of a new virtual currency.

Please see the TurboTax FAQ How do I report a crypto airdrop? Under Step 1, you would convert the value of your airdrops, promos, and rewards to US dollars (USD) if the issuer or exchange hasn't already done this for you.

You can use an online cryptocurrency converter, such as CoinMarketCap, to determine the USD value based on either the historical close price or the average price (doesn't matter which one you choose, as long as you stay consistent throughout your calculations.) Be sure to keep notes of your calculations with your tax records in case it's ever questioned.

[Edited 02/6/22|1:19pm PST]

[Twostates]

Thanks.  This answers only part of it.  The real question here is how can one be responsible for tax on income which is not actually available in USD.

you cannot pay taxes with Erc 20 tokens 

[HelenC12]

In my answer, in the TurboTax FAQ How do I report a crypto airdrop, under Step 1, you would convert the value of your airdrops, promos, and rewards to US dollars (USD) if the issuer or exchange hasn't already done this for you.

You can use an online cryptocurrency converter, such as CoinMarketCap, to determine the USD value based on either the historical close price or the average price (doesn't matter which one you choose, as long as you stay consistent throughout your calculations.) Be sure to keep notes of your calculations with your tax records in case it's ever questioned.

[Twostates]

Thanks.

Still not an answer regarding the drop in value and taxes due.

[ErnieS0]

There are two different events here and the answer to your question depends on timing.

As awesome tax expert @HelenC12 said, "airdrops, along with promos and staking rewards, only become taxable once the taxpayer 'acquires the ability to transfer, sell, exchange, or otherwise dispose of the cryptocurrency.'"

The value of your airdrop at the time you gain control is your "income".

Changes in value are not recognized until you actually do something with the coins. 

For example, if you received an airdrop valued at $10,000 in the first quarter and did nothing with it, then you make estimated payments based on $10,000, even if the current value is $2,000,

If you received a $10,000 airdop and sold it for $2,000 then you would pay estimated tax on $2,000 ($10,000 - $8,000 loss).

If you received a $10,000 airdop in the first quarter and sold in the second quarter, then you would pay estimated tax in Q1 on $10,000 and have an $8,000 loss in Q2. If you had other income in Q2, you would pay tax on the Q2 net.

[Twostates]

Thanks @ErnieS0 

I thought capital loss is 3k per year.

how are you deducting the 8k loss on 10k airdrop that sold for 2k.  I thought tax is on income of airdrop when received 

[DawnC]

Net capital losses are limited to $3K per year.   The remaining losses on carried over to future tax years.  

Your total capital gains for the year minus your total capital losses results in either a net capital gain or a net capital loss.

• Short term capital gains (gains on assets held one year or less) are taxed as ordinary income.
• Long term capital gains (gains on assets held more than one year) are taxed at a more favorable rate than ordinary income.
• Net losses are deductible, but only up to a maximum of $3,000 ($1,500 if married filing separately). Any capital losses you couldn't deduct this year can be carried forward and deducted on future tax returns. This is called a capital loss carryover.

The income from the airdrop is ordinary income and is reported and taxed when you gain control over the property.   If you received 10K in crypto in quarter 1, you want to make sure you pay the estimated taxes on that income.    Once you sell it later in the year or in a future year, the capital gain or loss is netted with all of your other capital gains and losses.   If you have more than $3K of net capital loss, the remainder is carried forward to future tax years.    

The reason for the estimated tax payments is to prevent late payment penalties.   Underpayment penalties are assessed if you don't withhold or pay enough tax on income received during each quarter.   In fact, it's entirely possible to get hit with an underpayment penalty even though you paid your tax bill in full by the April deadline or are getting a refund.   You will get a refund for any estimated taxes you paid in excess of your tax bill.    

[Twostates]

@ErnieS0 @DawnC 

so two different answers.  Who is correct?

if in fact 10 k airdrop q1 and sold in q1 for 2k, about 3k taxes due on 2k of actual income.  But the capital loss of 3k reduces it to zero?

if the numbers are double, 20k airdrop, sold for 4k, tax is 6k but 3k capital gain brings it to 3k tax on 4K of actual income.  ?.

this seems completely unfair at almost 100% tax rate.

[DawnC]

I think Ernie and I are saying the same thing.   If you have an airdrop of cryptocurrency you have control over, you have ordinary income for the value on that date.    Then all of your crypto sales and exchanges are netted at the end of the year.   If you have a net loss on those sales, you will only be allowed to deduct $3K of those net losses on this year's return.    Only the airdrops with value that you received for free are reported as ordinary income.   

I believe there is some confusion between the ordinary income reported when you receive the crypto and the capital gains and losses that occur after you dispose of (use it, sell it, or exchange it) the currency.   You are not going to be over-taxed for the transactions.     If you get a crypto award that has a value of $20K and you paid nothing for it, you have $20K in ordinary income.  Then you either hold the investment or dispose of it.

• if you hold it or keep it to use later - no additional information would go on your tax return
• if you dispose of it (sell, use, or exchange) - net this transaction with all other capital gains and losses; report net capital gain or loss on Schedule D

See the 3rd example in this article - it references a 'sold for a profit' scenario, but it works the same as if you sell it for a loss.   Capital losses are limited to 3K per year, but they do carry over to future years until they are all used up.