Who doesn't love a good piece of SWAG? For companies, it's a fantastic way to promote brand loyalty and create a lasting impression, especially for new initiatives. For recipients, it's an exciting perk that builds a sense of connection and appreciation.

That's essentially the idea behind crypto airdrops. Crypto companies offer free tokens to incentivize participation, spread awareness, and generate excitement within the community while ensuring a broad and equitable distribution.

In this guide, we’ll explain what crypto airdrops are and how their benefits can unlock new opportunities and potential rewards.

What is a crypto airdrop?

Crypto airdrops serve as marketing strategies in which crypto companies distribute free tokens directly to users' wallets. Companies often give these tokens in exchange for minimal promotional tasks, such as sharing a social media post, signing up for a newsletter, for providing liquidity in their ecosystem, or simply for holding a specific cryptocurrency. 

By widely distributing tokens, companies aim to generate interest in their projects, ensure a fair and broad distribution of their cryptocurrency, and promote decentralization. Also, airdrops reward loyal users and incentivize community engagement, fostering a more active and invested user base.

Decentralization

By distributing tokens to a large number of users, they prevent a small number of individuals from holding most of the tokens, helping to ensure a more decentralized and equitable network. This broad distribution upholds the core principle of decentralization, which is fundamental to many blockchain projects.

Rewarding loyalty

Airdrops also serve as a method to reward loyalty among early adopters and dedicated users. By airdropping tokens to early project supporters, companies incentivize long-term commitment and engagement. This strategy strengthens community loyalty and helps stabilize the token’s value by encouraging users to hold onto their airdropped tokens.

Types of crypto airdrops

Crypto airdrops come in various forms, each with unique characteristics and purposes. For companies, how airdrops work is straightforward: They serve as marketing tools that help grow their projects by attracting new users and rewarding existing ones. For crypto investors, airdrops offer a strategic way to expand their portfolios through community participation. 

The main types of crypto airdrops include:

• Standard airdrops: Standard airdrops distribute free tokens to users who meet specific criteria – typically, users need to interact with a decentralized application (dApp) to automatically enroll their wallet to receive the airdropped tokens. This type of airdrop is popular because it doesn’t require significant actions from users.
• Bounty airdrops: Bounty airdrops reward users for completing specific tasks, such as promoting the project on social media, writing blog posts, or identifying bugs in the project’s software. These activities enhance the project's visibility and foster user engagement.
• Holder airdrops: Holder airdrops distribute tokens to users who already own a certain quantity of another cryptocurrency. The amount received is usually proportional to the holdings in the user's wallet at a specific snapshot date. This type of airdrop aims to garner support from another well-established token’s community to help build organic demand for the airdropped tokens.

How do you get airdrops?

To participate in an airdrop, investors should follow several key steps to ensure they receive tokens properly and safely. Doing so helps protect against potential scams and fraudulent activities.

1. Possess a cryptocurrency wallet 

Users need a self-custodied cryptocurrency wallet that supports the specific tokens a company is offering and ensures adequate security for handling private keys to receive airdrops. This means choosing a wallet that's compatible with the token standards – such as ERC-20 for Ethereum-based tokens – and has strong security features to protect against unauthorized access.

2. Securely store a specific quantity of cryptocurrency tokens

Holding the required amount of cryptocurrency tokens in self-custodied wallets can make users eligible for certain airdrops. Users must securely store the designated tokens to qualify for upcoming distributions. For example, a project might require users to hold a minimum of 50 tokens of a specific cryptocurrency in their wallet to receive the airdropped tokens. This ensures that the user meets the eligibility criteria set by the project and can participate in the airdrop.

3. Explore cryptocurrency airdrop initiatives 

Stay informed by following specialized websites and platforms that track airdrop opportunities. Engaging with communities on Discord and X (formerly Twitter) can also provide announcements and explain eligibility standards for project airdrops. Participating in these communities allows users to ask questions, share experiences, and get real-time updates on new and ongoing airdrop campaigns.

4. Adhere to the rules governing cryptocurrency airdrops

Users looking to receive cryptocurrency airdrops must adhere to the specific rules set by each project. These requirements help ensure active participation and engagement within the community to promote the project's growth and stability.

Are crypto airdrops taxable?

While receiving crypto airdrops is exciting and can lead to free tokens, users must be aware of the tax implications. The Internal Revenue Service treats airdrops as taxable events, classifying them as ordinary income upon receipt. This requires reporting the fair market value of the airdropped tokens as income on the date they are received. This fair market value, recorded on the distributed ledger, must be included in the user's gross income for that tax year. 

Additionally, airdrop transactions can lead to capital gains or losses upon subsequent sales. The cost basis for these tokens is their fair market value at the time of receipt. Selling the tokens for more than the cost basis results in a capital gain, while selling for less results in a capital loss.

Users should track the date of the airdrop, the fair market value of the tokens at that time, and subsequent sales information. Detailed record-keeping allows for accurate reporting on tax forms like IRS Form 1040 Schedule 1 for income and Form 8949 for capital gains and losses.

Crypto airdrops: Potential risks and scams

Participating in crypto airdrops can be an enticing way to collect free tokens, but users should be aware of potential risks and scams. Here are some of the most significant dangers to consider:

Security risks

Allowing airdrops into user wallets carries inherent risks. To prevent unauthorized access, crypto investors must securely store private keys in their wallets. Utilizing hardware wallets and enabling two-factor authentication can further enhance security and protect against potential threats.

Fraudulent activities

The crypto economy is still young, with many scams prevalent, and airdrops are no exception. Scammers often create fake events, websites, and social media accounts to deceive users into providing personal information or transferring cryptocurrency. Always verify the legitimacy of an airdrop through official project channels before participating.

Phishing 

Airdrop scams come in many forms, with phishing schemes being among the most common. Fraudsters send emails or messages that appear legitimate by mimicking official communications. A similar scenario often occurs in the hiring market, where job seekers receive texts inquiring about their employment status, usually lacking a clear job description or relevant details, and requesting personal information for identity theft or other fraudulent activities.

These scams can result in significant financial loss and should be approached with caution. Always verify the legitimacy of such communications through official channels or trusted third parties before providing any personal details.

Many phishing attacks will involve airdropping a token which cannot be traded to many wallets. These phishing attacks aim to get users to sign malicious transactions that claim to enable the wallet to trade the airdropped tokens. However, these transactions typically drain your wallet by giving access to all the tokens in your wallet.

Noteworthy crypto airdrops

Over the years, several historical crypto airdrops have stood out for their innovative distribution methods and the substantial value of distributed tokens. These airdrops not only rewarded early adopters but also helped generate widespread awareness and community engagement for emerging projects. 

Here are some of the most notable crypto airdrops from the last few years:

Uniswap ($UNI)

In September 2020, Uniswap conducted an airdrop rewarding all wallets that had interacted with the platform before that date. Eligible wallets included those that had swapped tokens on Uniswap, added liquidity, redeemed SOCKS, or held SOCKS at the time of the airdrop. Each eligible wallet received 400 $UNI tokens, which reached a peak value of approximately $16,000 in May 2021. The airdrop could be claimed through the Uniswap web app.

Arbitrum ($ARB)

Arbitrum conducted an airdrop in March 2023, allowing wallets that earned three or more points based on eligibility criteria to claim tokens. The Arbitrum Foundation used the airdrop to reward early adopters of their layer 2 blockchain and kickstart their decentralized governance process, which allows $ARB holders to vote on governance proposals on-chain. Eligible wallets received between 1,250 and 10,250 $ARB tokens, with an opening price of approximately $1.49 per token, though prices varied across exchanges.

Ethereum Name Service ($ENS)

Ethereum Name Service, a decentralized service that maps human-readable .eth names to Ethereum addresses, conducted an airdrop on October 31, 2021. The airdrop was based on how long users had held their .eth names and how long those names were registered. A total of 100 million $ENS tokens were distributed among .eth name holders, ENS contributors, and the DAO community treasury.

Blur ($BLUR)

Unlike previous examples, Blur, an NFT marketplace, conducts seasonal airdrops to reward users who actively trade NFTs on its platform. The rewards vary each season, depending on the level of NFT trading activity associated with a wallet on Blur's marketplace.

Jito ($JTO)

Jito, a liquid staking service provider for Solana, distributes MEV rewards to its stakers. In an airdrop, Jito allocated $JTO tokens, which are used for governance, to users who staked with Jito, Jito-Solana validators, and Jito MEV searchers. Stakers with Jito received between 4,491 and 104,391 $JTO tokens per eligible wallet, based on the points earned through staking.

How to identify upcoming airdrops

While many speculate about upcoming airdrops and eligibility criteria, the best way to stay informed is by following official announcements from the projects you're interested in. Most projects share airdrop news on their social platforms like X (formerly Twitter), Discord, Telegram, or Reddit, often announcing details before or after taking a snapshot of eligible wallets.

Tools like DeFi Llama aggregate expected airdrop opportunities, offering users a clear overview of potential upcoming distributions. However, it's important to exercise caution and always verify a project's legitimacy through its official channels to avoid scams.

Take the stress out of crypto taxes with CoinTracker

Imagine receiving countless airdrops from dozens of crypto communities without the hassle of dealing with taxes. CoinTracker seamlessly syncs with your wallets, helping you automatically track every transaction and effortlessly generate tax forms.

Backed by years of experience in the crypto space, CoinTracker provides detailed insights and streamlines tax reporting. Whether you're handling crypto airdrops, trades, or staking rewards, CoinTracker simplifies your crypto trading experience.

Start today for free and join over 2 million users who trust CoinTracker to manage their crypto taxes.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.