Airdrops are a technique of driving the growth and adoption of a project without having to ask the users to prefund development or pay for access. This is complete reversal of Initial Coin Offerings since a project may have already received financing and all that a team is doing is incentivizing adoption by distributing value. In a way airdrops are like sign-up bonuses that financial institutions offer in order to lure individuals into opening a bank account for instance.
The difference however comes in the fact significant resources are being allocated to the incentives. Some Initial Coin Offerings are for instance reserving between 5% and 10% of what they have raised to be distributed back to the community. By giving such generous incentives this tends to increase the price of a token. In the case of EOS (EOS) for instance the price of the cryptocurrency increased by 45% when it was anticipated that an airdrop was going to be conducted.
Airdrops can also be used to encourage growth by tying them to bounty tasks such as downloading a virtual currency wallet, joining a group on Telegram or following an account on Twitter. NEO (NEO) for instance gave tokens to individuals who signed up for its Ontology newsletter and these tokens are now worth close to $10,000.
Recent trends demonstrate that projects are interested in building a community prior to the completion of software development. One of the possible reasons for this is to pile pressure on digital currency exchanges to get the token listed. Additionally it could be a way of financially engineering demand and positive sentiment.
Taxation of free tokens
Due to the fact that airdrops can be viewed as income they may also be taxed similarly since value that has a cost basis of zero is being offered. Forks and airdrops also have similarities to dividends. It is thus important for those receiving them to get the necessary tax advice.
At the moment there is fraudulent behavior with regards to airdrops and regulation is needed to correct the situation. This is seen in the fact that there are those who are offering free tokens and then making their money via capital gains before walking away without having positively contributed anything.
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