The highly anticipated Spark token snapshot takes place on December 12, at 0:00 GMT. Ripple XRP holders eagerly await this date, but Head of Tax Strategy at CoinTracker, Shehan Chandrasekera, warns that airdrops are a taxable event.
As such, individuals who register for and receive Spark tokens must include this as ordinary income when filing U.S. taxes.
Taxpayers should consult a qualified professional if they need help.
Ripple XRP Holders Lumped With Tax Liability
Although there have been numerous airdrops in the past, specific tax guidance on airdrops did not exist at the time.
However, as cryptocurrencies have grown in market cap and become increasingly recognized within the finance world, the IRS has clarified rules regarding the tax treatment of airdropped tokens.
IRS Rev. Rul. 2019-24 classifies cryptocurrency as a virtual currency, which is subject to taxation as ordinary income.
The rules mention airdrops specifically by defining what an airdrop is, even acknowledging that they can exist without a hard fork, as is the case with the Spark airdrop.
What’s more, IRS Rev. Rul. 2019-24 breaks down cut off points based on differences between when the airdrop is recorded, and when the taxpayer has control over the tokens.
This is particularly relevant as the Spark airdrop will come in batches over (up to) a 34 month period.
“At network launch, each account that has claimed Spark will receive 15% of the total Spark for which they are eligible. This is 15% of the Spark claimable term in the equation above. The remaining Spark claimable will be distributed over a minimum of 25 months and a maximum of 34 months.”
Eligible accounts get credited initially with 15% of their due balance. The remainder is distributed monthly via a “pseudo-random number,” between 2 and 4, generated by the Flare Time Series Oracle (FTSO).
“For example, if person X has 1000 Spark claimable and 4% is picked every month by the FTSO, they receive 1000*15% = 150 Spark at day 1, and then (1000-150)*4% = 34 additional Spark per month for 25 months, coming to a total of 1000 Spark.”
It’s likely this distribution method was chosen to minimize the likelihood of a Spark token price dump.
XRP Breaks Near Three Year Slump
Analysts have credited the Flare Network Spark token airdrop with reviving XRP from its price slump.
During the downturn, XRP earned the unenviable title of the worst-performing large-cap crypto. This led to a great degree of ridicule from the wider crypto community.
However, just last month, after near three years of taunting, XRP broke key resistance, around the $0.30 level. It went on to climb as high as $0.78 on Binance, even outperforming Bitcoin at one point.
The shock move restored confidence in Ripple and what the company hopes to achieve in the future.
Today sees a broader market downturn led by Bitcoin’s failure to hold $18.5k support. As a result, XRP is down 13% to $0.52.
Source: XRPUSDT on TradingView.com