A coming crypto airdrop will have tax ramifications for XRP investors in the US, according to the head of tax strategy at CoinTracker.
Flare Networks is preparing to airdrop Spark tokens to XRP investors at a 1:1 ratio. The token is designed to be part of a new smart contract ecosystem that brings Ethereum-type functionality to the XRP Ledger. Flare calls the airdrop a first-of-its-kind utility fork.
“Flare’s token, Spark is created through what may be the first-ever utility fork whereby the origin network, in this case the XRP Ledger, benefits through increased utility.”
CoinTracker’s Shehan Chandrasekera says the airdrop comes with a tax bill based on an updated guidance from the Internal Revenue Service (IRS) released last year.
“For example, say you received 1 Spark token on December 12, 2020. On this day, it’s worth $1. However, you don’t get any control over the coin until January 1, 2021. On this date, 1 Spark token is worth $3. January 1st is the day you gain dominion and control of the asset. Therefore, you would have to report $3 of ordinary income in 2021 taxes.
If you were to sell this in February for $5, you would have a capital gain of $2 ($5 – $3).”
In October of 2019, the IRS published its first crypto tax guidance in five years, addressing airdrops for the first time.
“A taxpayer has gross income, ordinary in character, under § 61 as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency.”
Flare is set to take a so-called “snapshot” of eligible wallets on December 12th in order to distribute the new crypto asset. Exchanges that support the airdrop such as Coinbase are likely to give Spark tokens to their customers at a later date.
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