Hard Forks and Airdrops in Crypto Accounting
Introduction
Airdrops and Hard Forks, although not new concepts, do come with complexities when it comes to accounting for them. Both airdrops and hard forks have one thing in common, the company/person receives extra tokens which they did not directly purchase. It's a one way transaction, in the blog post we will be explaining how to deal with airdrops and tokens that you receive with hard forks.
Hard Forks "A hard fork is a major software update for a blockchain network that occurs when a group of developers and users disagree with the existing rules or features of the blockchain and decide to create a new one with new rules and features." This leads to the blockchain splitting into two, with one group following the original version and the other group following the new version. The new version of the blockchain can have its own unique token, and this can result in a lot of volatility in the cryptocurrency market.
An example of a hard fork is Bitcoin Cash, where there was a lot of disagreement about Bitcoin's blockchain rules. As a result, Bitcoin underwent a hard fork, resulting in the blockchain splitting into two - Bitcoin and Bitcoin Cash. Anyone holding Bitcoin automatically received an equal amount of Bitcoin Cash in the new blockchain.
When a blockchain undergoes a hard fork, you receive the same amount of tokens in the new blockchain. You will need to record the new cryptocurrency as an income at fair value on the day of the hard fork. It's also important to determine the fair value of the original cryptocurrency prior to the hard fork as it can be used to calculate the net gain or loss resulting from the event.
Airdrops "Airdrops are free tokens or coins that are distributed to a larger number of wallet addresses, often as a way of promoting a new cryptocurrency or NFT project." Accounting for airdrops can be a bit complex as it depends on factors such as the purpose of the airdrop, type of airdrop, and the type of token received.
The first step in accounting for an airdrop is to determine the fair market value of the token at the time it was received. Depending on the purpose of the airdrop, the token most likely needs to be recorded as income. If the airdrop is a reward for holding a specific token, it can be considered as a dividend payout. If there are any expenses such as platform fees or gas fees associated with the token, they can be recognised as an expense.
With airdrops becoming very common, your wallet can get cluttered with airdrops of no value. You need to be able to recognise the tokens that have a value, and ignore other tokens. Mensari lets you ignore tokens that have no value, so your books stay clean and up-to-date. We are also making our platform smarter, so it can recognise and ignore junk airdrops and save time for your finance team.