An Airdrop of New Cryptocurrency Following a Hard Fork Is Explained

A hard fork is a significant event in the world of cryptocurrency, where a blockchain splits into two separate chains, often resulting in a new cryptocurrency being created. This new cryptocurrency can then be distributed to users through an airdrop.

During a hard fork, the existing blockchain is modified to create a new version, which can be used to create a new cryptocurrency. This new cryptocurrency is often created with a new token or coin, which can be sent to users' wallets.

In the case of a hard fork, the new cryptocurrency is often created by the developers of the original blockchain, who may choose to distribute it to users through an airdrop. This can be a way for developers to reward users for holding onto their existing cryptocurrency, or to incentivize users to try out the new cryptocurrency.

Users who hold a certain amount of the original cryptocurrency may be eligible for the airdrop, and will receive a corresponding amount of the new cryptocurrency.

A cryptocurrency is a digital or virtual currency that uses cryptography for security and is decentralized, meaning it's not controlled by any government or financial institution. It's like the cash in your wallet, but instead of physical bills and coins, it exists only on computers and phones.

Cryptocurrencies can be sent and received electronically, and transactions are recorded on a public ledger called a blockchain. This makes them fast, secure, and transparent.

The goal of a cryptocurrency is to provide a new way of making transactions and storing value, often with lower fees and more flexibility than traditional currencies.

Cryptocurrency is a virtual or digital currency that uses cryptography for security and is decentralized, meaning it's not controlled by any government or financial institution. It's like the money in your wallet, but instead of being physical, it exists only on computers and phones.

A cryptocurrency is created through a process called mining, where powerful computers solve complex mathematical problems to validate transactions and add them to a public ledger called a blockchain. This process helps to secure the network and verify the integrity of transactions.

Cryptocurrencies can be bought and sold on online exchanges, and they can also be used to purchase goods and services from merchants who accept them. Some people even use cryptocurrency as a store of value, similar to gold.

A cryptocurrency airdrop is a marketing strategy that involves sending coins or tokens to wallet addresses for free or in return for a small service, such as retweeting a post. The ultimate goal of a crypto airdrop is to promote awareness and circulation of a new token or coin.

An airdrop is a marketing stunt that involves sending free coins or tokens to wallet addresses to promote awareness of a new virtual currency.

You can receive airdropped tokens by signing up for a newsletter, tweeting about a token, or simply providing your wallet address.

The value of most airdropped tokens is hardly more than zero, exceeding no greater value than that.

As a taxpayer, you would recognize ordinary gross income based on the fair value of the new coin or token at the time of receipt, according to the Revenue Ruling.

A hard fork in a blockchain network can lead to a permanent divergence from the previous version, creating a new currency. This means that users can choose to upgrade to the new software or stick with the old one.

A hard fork can be started by the developers or community members of the blockchain. The new rules may view valid blocks from the old software as invalid, or vice versa.

If a group of users continues to use the old software while others use the new one, a permanent split can occur. However, it's common for users to eventually upgrade to the new software as it becomes outdated and less useful.

Airdrops are often used by blockchain startups to promote their new cryptocurrency project after a hard fork. These airdrops can be sent to specific wallets based on the blockchain network or coins held in existing wallets.

Crypto is a digital or virtual currency that uses cryptography for security and is decentralized, meaning it's not controlled by any government or financial institution.

A crypto airdrop is a marketing strategy where crypto projects send tokens or coins to eligible users' wallets, often in exchange for simple tasks like sharing with friends or owning a specific number of tokens.

Think of it like a surprise gift that magically appears in your digital wallet, as seen in Binance's surprise airdrop that offered over 100 free NFTs to existing holders of the CR7 Forever Worldwide NFT collections.

Crypto airdrop announcements on social media platforms help to gain attention from the community and increase engagement and loyalty of existing token holders.

These airdrops are a way for blockchain startups to bootstrap their project and gain traction, making crypto a viable option for those looking to invest or participate in the digital economy.

Cryptocurrency airdrops are a great way for new projects to get the word out and attract more users. They're essentially free gifts of cryptocurrency sent to people's wallets.

To qualify for an airdrop, you might need to hold a certain amount of a specific cryptocurrency in your wallet. Alternatively, you might need to complete a task, like posting about the currency on social media.

Airdrops are often promoted on the company's website, social media, and cryptocurrency forums. They're a way for new projects to bootstrap their way into the market.

Hard forks are a type of rule change that can have significant implications for the entire blockchain network. They're essentially a permanent divergence from the previous version of the blockchain.

A hard fork can create a new, separate currency, where one path follows the new, upgraded blockchain and the other follows the old path. This can lead to a permanent split in the network.

Crypto airdrops are a way to reward early adopters and those engaged with a project, giving them a stake in the project. This can be a great way to raise awareness of a project and encourage adoption of a new token.

Airdrops can distribute tokens in a way that wouldn't happen naturally in an open market, which can be a benefit for some investors.

However, airdrops can also pose security threats if wallet holders are required to connect to suspicious sites to claim the airdrop.

Here are some potential risks associated with crypto airdrops:

The crypto airdrop process is a deliberate decision made by a project or company to distribute new cryptocurrency to a select group of people. This can be in response to market strategies or a hard fork in the network.

To begin, the company must decide how to facilitate the airdrop and who is eligible to receive the new cryptocurrency. This can include gathering information from interested parties, such as wallet addresses and email addresses.

A snapshot is a capture of an instance that identifies who possesses certain criteria, like holding a minimum amount of tokens. The company may perform a snapshot to identify all addresses that held at least 1,000 tokens as of a specific date.

The airdrop is often facilitated through the use of smart contracts, which automatically distribute the new cryptocurrency to the selected recipients. The company may also use their Treasury wallet to facilitate the airdrop and publicize the transaction block to demonstrate the equitability of the airdrop.

Airdrop recipients often directly receive the new cryptocurrency without having to accept it, and some may need to add the token or coin to their wallet to view their balance.

Here are some reasons why companies might conduct a crypto airdrop:

Cryptocurrency has its advantages and disadvantages. One major con is its volatility, as seen in the example of the Bitcoin price drop of 50% in just one day.

High transaction fees are another drawback, with some transactions costing as much as $50. This is because the network is congested, causing a surge in fees.

On the other hand, cryptocurrency is decentralized, meaning that it's not controlled by any government or institution. This gives users more freedom to make their own decisions.

However, this lack of regulation also means that there's a risk of scams and fraudulent activities. In the case of the airdrop, there's a risk that the new cryptocurrency may not be legitimate.

Cryptocurrency is also secure, with advanced encryption methods in place to protect transactions. This is due to the use of blockchain technology, which records all transactions in a public ledger.

But, the complexity of the technology can be a barrier for some users, making it difficult to understand and use.

In 2021, Gas DAO was formed to distribute tokens to individuals who had paid a significant amount of Ethereum gas fees, with 55% of tokens airdropped to 634,429 eligible wallets.

The concept of Gas DAO was to tie ownership of the DAO to the largest users of Ethereum, creating a unique entity structure.

At the same time, OpenDao distributed tokens to NFT holders based on OpenSea trading activity, with ownership of OpenDao tokens airdropped based on NFT-ownership.

OpenDao's market cap peaked at over $250 million, but had dropped to less than $11 million by September 2022.

Investors should note that the market value of OpenDao can fluctuate rapidly, highlighting the risks involved in investing in cryptocurrencies.

An airdrop of new cryptocurrency following a hard fork is a complex process, but let's break down the final step: distribution.

The final step of the airdrop involves distributing tokens to selected wallet addresses, and the number of tokens distributed varies depending on the project's token distribution criteria.

Smaller airdrops may be distributed manually, with the project team sending tokens to users' wallets, while larger, decentralized airdrops use automated smart contracts to send tokens to eligible wallets based on predefined rules.

Some projects use a claiming mechanism, requiring users to claim their tokens via a web interface to reduce gas costs and avoid sending tokens to inactive wallets.

Here are the different distribution methods used in airdrops:

Projects airdrop tokens to generate hype and excitement among the crypto community through marketing campaigns. This helps gain attention from new users, existing users, and potential investment opportunities.

Airdrops can also strengthen a community by rewarding existing members with tokens, which in turn helps build a loyal community. A strong community can also help build trust during new user onboarding.

Token holders, governance participants, stakers, investors, and project team members are rewarded a portion of the total token supply through airdrops. This incentivization encourages them to continue engaging and supporting the project.

Airdrops can stimulate activities like trading, investing, and staking, which can enhance token liquidity and potentially drive the token's value.

Distribution is a crucial step in the airdrop process, and it's essential to understand how tokens are delivered to eligible wallet addresses.

The number of tokens distributed per wallet address varies depending on the project's token distribution criteria, which can include factors like the user's level of engagement or the amount of tokens they're eligible for.

Smaller airdrops may be distributed manually, with the project team sending tokens to users' wallets. Automated smart contracts can also be used for larger, decentralized airdrops, sending tokens to eligible wallets based on predefined rules.

Some projects require users to claim their tokens via a web interface, which helps reduce gas costs and prevents tokens from being sent to inactive wallets.

Here are the different distribution methods used in airdrops:

The airdrop conducted by Arbitrum in March 2023 involved the distribution of around 11.6% of the token's total supply, amounting to 1.162 billion ARB tokens to eligible wallet addresses.

Bitcoin Cash (BCH) was created on August 1st, 2017, after the Bitcoin blockchain hard-forked into two separate blockchains.

The new blockchain, BCH, had a block size cap of 8MB, a significant increase from the original Bitcoin's block size cap. This change was a key factor in the creation of BCH.

A holder of one Bitcoin automatically became an owner of one Bitcoin Cash as well at the instant the hard fork happened.

Hard forks and soft forks are two types of blockchain splits that occur when a rule change is made. Hard forks create a permanent split in the network, while soft forks allow upgraded nodes to still communicate with non-upgraded nodes.

In a hard fork, nodes stop processing blocks following the addition of new rules, whereas soft forks don't clash with the code and old nodes might accept data that appears invalid to the new nodes. This means that with soft forks, users won't even notice the difference.

A hard fork is a permanent split of a blockchain caused by a modification in the rules governing the chain. This can result in the validation of blocks and transactions that were previously invalid.

Imagine a scenario where you held some bitcoin in your wallet, and after a hard fork, you received an additional cryptocurrency, like Bitcoin Cash. This is exactly what happened in 2017 when the Bitcoin blockchain forked into two chains.

A hard fork requires that all developers upgrade to the latest version of the protocol software, making the old version of the blockchain software no longer compatible with the new version. This creates a permanent chain split, with the old version no longer able to validate blocks and transactions.

A fork in a cryptocurrency happens when a majority of the users of a blockchain cannot come to an agreement on an update. This can result in a hard fork, which is a permanent split of the blockchain.

Hard forks are caused by a modification in the rules governing the chain, making previously invalid blocks and transactions valid, or vice-versa. This can lead to the creation of a new cryptocurrency, as seen in the 2017 Bitcoin fork into Bitcoin and Bitcoin Cash.

Accidental forks happen when two or more blocks are found at the same time, and it is resolved when subsequent blocks are added, and one of the chains ends up being longer than the other. The miner that mined the orphaned block loses the mining reward and transaction fees.

Intentional forks, on the other hand, alter the blockchain rules, and can be split into two types: hard forks and soft forks. Hard forks require that all developers upgrade to the latest version of the protocol software.

The outcome of a hard fork can be seen in the example of Bitcoin, where one bitcoin was split into two - one Bitcoin and one Bitcoin Cash. This means that if you held some bitcoin in your wallet before the fork, you would still own your bitcoin, but you would also receive one bitcoin cash for each bitcoin you held.

Soft forks do not create a permanent chain split and are backwards-compatible, meaning the old version of the blockchain software can still be used with the new version.

Backwards compatibility is a key concept in blockchain upgrades. Soft forks are backwards-compatible, meaning that both upgraded and non-upgraded nodes work on the same chain.

Soft forks are more like software upgrades, where you can still read and use older versions of files created by the program. This is because the two versions of the software remain compatible in soft forks.

A soft fork does not create two blockchains, unlike a hard fork. Instead, it still remains one blockchain.

The tax implications of an airdrop of new cryptocurrency following a hard fork can be complex. The Revenue Ruling states that you'll need to recognize ordinary gross income based on the fair value of the new coin or token at the time of receipt.

You might receive new units of cryptocurrency as a result of a hard fork without doing anything to claim them. This can create complexity around valuation due to uncertainty around exchange support, inefficiency, and illiquid markets.

The IRS has published guidance on calculating taxes owed on cryptocurrency holdings, including tax liabilities created by cryptocurrency forks. This guidance addresses acceptable methods for valuing cryptocurrency received as income.

You might be credited with new tokens or coins to your account on a popular exchange, even if you had nothing to do with the hard fork. This can raise questions about whether you need to recognize the fair value of the new crypto as ordinary income.

The IRS' 2014 guidance left many questions unanswered, and the crypto market has grown more complex in the years since. The agency has finally provided fresh guidance on tax liabilities created by cryptocurrency forks.