Crypto Airdrop — What Is It and How Does It Work?

If you want to find out what lies behind the crypto airdrop meaning and concept, we’ve got you covered.

In this guide, you’ll find out why crypto projects use airdrops, how airdrops work, and what their main advantages and disadvantages are. We’ll also tell you how to get crypto airdrops and how they are taxed. And finally, we’ll explain the differences between different types of airdrops.

What Is a Crypto Airdrop?

Crypto airdrop refers to marketing tactics blockchain startups use to promote their projects. The goal is to draw the attention of crypto enthusiasts to a certain project by offering them free tokens.

Airdrop is usually promoted on the websites of companies, which send free tokens to crypto wallet owners. It doesn’t require financial investments as it’s used exclusively as a promotional strategy. In short, airdropping allows people to get crypto tokens without buying them.

How Do Crypto Airdrops Work?

The process starts with a public campaign. Then the company creates lists of eligible participants, by collecting their wallet or email addresses.

The next step is setting the terms. These may include using the platform, holding certain crypto assets, signing up for the newsletter, or following the project through social networks.

After the participants fulfill the terms, the company will send them free tokens via smart contracts. They may also publish the list of winners on their forums or social networks and transaction blocks. This is to prove the legitimacy of their airdrop.

Types of Cryptocurrency Airdrops

There are five types of crypto airdrops — standard, bounty, holder, exclusive, and raffle. Here’s how they differ.

Bitcoin being lifted up from a row of bitcoins

Standard Crypto Airdrops

This type of airdrop involves distributing rewards to randomly selected participants. Its goal is to create initial interest in a specific token. These are mostly new tokens that need promotion. Standard airdrops usually ask participants to create an account on the company’s platform.

These types of airdrops are usually time-sensitive as they come with a limited amount of tokens intended for distribution.

Bounty Crypto Airdrops

Bounty airdrops refer to rewarding participants for completing certain tasks. These tasks generally include tweeting announcements related to the project, tagging the company on social media, or signing up for a newsletter.

Some companies may offer referral rewards to those who recommend their project to other crypto enthusiasts. After completing the tasks, participants are rewarded with tokens. This type of airdrop is often implemented by companies that create NFT projects.

Holder Crypto Airdrops

This system gives rewards to everyone who holds the company’s selected cryptocurrency during the promotion. The holder airdrop starts when the platform captures a snapshot of users’ wallets at a set time or date. Anyone with the chosen cryptocurrency at that moment will get a reward in the form of additional tokens.

These types of airdrops can be implemented by both project owners and third parties.

Exclusive Crypto Airdrops

These airdrops are intended for select groups, chosen based on their contribution to the project. This also means that the amount of their tokens will not be decisive in the selection. On the contrary, those who spent the most time on the project will have an advantage.

Qualification requirements include creating an account, joining a group, and supporting the project within the community forum.

Raffle Crypto Airdrops

This type of airdrop allows participants to win free tokens through lottery-style drawings. To participate in the drawing, users must complete specific tasks. Those include retweeting project tweets and liking and sharing posts on social networks.

The goal of these airdrops is to create interest in a certain project and increase its engagement.

How Are Crypto Airdrops Taxed?

To report an airdrop income, applicants must use a Schedule 1 Form 1040. The airdrop must be reported as Other income. The applicant must also determine its fair market value, which was valid at the time of receipt.

Those who want to sell their airdrop must fill out two forms — Schedule D and Form 8949. Schedule D refers to capital gains and losses that are taxable in the US. The installment amount is based on the holding period.

Holding airdrops for more than a year will be considered long-term, while anything under a year will be seen as short-term. The short-term tax rate varies between 10% and 37%, while a long-term tax rate ranges from 0% to 20%.

The Form 8949 must include transaction details, such as the date the airdrop was received and its fair market value.

In addition to federal taxes, airdrop recipients may also have to pay local and state taxes. Failure to report these rewards as taxable income will result in penalties.

Crypto Airdrops Pros and Cons

Here are the main advantages and disadvantages of airdrops:

Pros	Cons
Enabling the distribution of tokens to a wider audience	Subject to taxes and government regulations
Helping brands promote their projects	Potential decrease in the tokens’ value
Reducing marketing costs	Not all airdrops are part of legitimate projects
Helping brands build a user base	They may represent a security threat
Promoting decentralization

Why Have an Airdrop

Airdrops can benefit their holders in several ways. First of all, investors can profit by holding a certain token that they believe will increase in value over time. They can trade the top free crypto airdrops on all major crypto exchanges.

In addition to their monetary value, tokens also give their holders the right to participate in important project decisions. Investors can learn how to take part in blockchain projects through airdrop campaigns.

When it comes to companies, airdrops will help them bring a project closer to a wider audience. Likewise, by implementing airdrops, they’ll be able to increase the liquidity of their new crypto token. Airdropping will also reduce the marketing costs.

How to Get Crypto Airdrops

People can find airdrops on:

Crypto airdrop websites
Social media networks
By using the #airdrop hashtag
On crypto-related forums

To claim airdrops, participants will need a compatible wallet and a qualifying cryptocurrency. For example, if the project involves a Bitcoin private airdrop, participants must have BTC in their wallet to qualify.

Next, the participants will have to complete certain tasks imposed by the project’s founders. While these tasks will vary from project to project, they usually include:

Engaging with the company’s social media channels
Filling out surveys and taking quizzes related to the project
Connecting the wallet with the platform
Holding a specific number of tokens
Using referral programs

Airdrop events usually take place after a hard fork, i.e., when there are changes in the network protocol that result in the creation of two paths. One path follows the new, upgraded blockchain, while the other follows the original path.

The best example of this is Bitcoin Cash which was forked from bitcoin and then airdropped to all BTC holders.

Conclusion — Are Crypto Airdrops Worth It?

Whether or not crypto airdrops are worth it depends on individual circumstances and goals. Airdrops can be a great way to earn free cryptocurrency and potentially profit from it in the future.

However, they also come with risks, such as scams and low-quality projects. It’s important to research and evaluate the credibility and potential of the project before participating in an airdrop.

Overall, airdrops can be a fun and potentially profitable way to engage with the cryptocurrency community.