Ripple CTO Explains Why Airdrops Could Do More Harm Than Good

David Schwartz, Ripple’s CTO, says that airdrops in the cryptocurrency space, especially the tax consequences, could be tricky for recipients. He addressed the concerns of the XRP community and gave an honest review of how reward systems are usually set up. He explained that the way they are designed sometimes leads to unexpected financial problems.

In particular, Schwartz touched on how XRP is taxed when it is received as income and how it is appreciated over time. He explained that long-term capital gains are only taxed on the increase in value, but income is taxed when the asset is first received.

This same idea applies to airdrops, where the timing of when the asset is received, not how it’s used or claimed by the recipient, often decides if it is taxable.

The CTO then turned his focus to automatic and self-claimed airdrops, such as FLR and SGB tokens held in platforms like Bifrost. These tokens were airdropped to XRP holders previously.

Schwartz noticed that whether claiming is done automatically or manually doesn’t really matter tax-wise. Once tokens are set aside for a user, they are usually seen as taxable income, no matter if the person accesses them or just holds them.

Auto and self-claiming have, IMO, no effect on when rewards are taxable. Yes, I recommend against this kind of distribution method in general for a few reasons but one is the negative tax consequences. I prefer the “your tokens appreciate” method over the “you get reward tokens”.

— David “JoelKatz” Schwartz (@JoelKatz) January 4, 2025

Schwartz pointed out that the problem here is that it makes things more complicated for the people who hold it. Airdropped tokens are taxed based on their value when they are given out, even if they are supposed to be held long-term or used in an ecosystem later on.

If these tokens increase in value, users might have to pay more in taxes, which would make things worse.

Instead of these reward systems, Schwartz suggested using methods that focus on the appreciation of existing tokens rather than issuing new ones. This way, users don’t have to deal with the immediate tax issues that come with airdrops, and it is better for their long-term interests.

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