Are Crypto Airdrops Illegal In US?

In the world of cryptocurrency, airdrops have become a popular tool for projects to distribute tokens, build communities, and generate buzz. However, for participants and projects in the United States, a critical question looms: are crypto airdrops illegal? The answer is not straightforward, as it depends on regulatory interpretations, particularly by the Securities and Exchange Commission (SEC), and involves tax considerations. This article explores the legal landscape of crypto airdrops in the US, diving into key facts, regulatory frameworks, and ongoing debates to provide clarity on this complex topic.

What Are Crypto Airdrops?

A crypto airdrop is a distribution of free cryptocurrency tokens, usually to wallet addresses of existing holders or users of a particular blockchain. Typically used to promote a new cryptocurrency or decentralized finance (DeFi) protocol, airdrops aim to leverage the network effect by engaging existing holders of major cryptocurrencies like Bitcoin or Ethereum. Airdrops come in several forms:

• Standard Airdrops: Open to anyone who registers, often requiring only a valid wallet address.
• Bounty Airdrops: Require participants to complete tasks, such as posting on social media or joining a platform.
• Holder Airdrops: Distributed to existing holders of specific tokens or coins.
• Fork-based airdrops (from chain splits)
• Staking rewards

For example, in 2020, Uniswap airdropped its native UNI token to users who had made at least one trade on its platform, with the token’s value rising significantly, netting some recipients thousands of dollars. While airdrops may appear as “free money,” their legal and tax implications in the US complicate their appeal.

Airdrops are often used to:

• Promote a new project
• Reward loyal users
• Incentivize adoption
• Distribute governance tokens in DAOs

The Legal Question: Are Airdrops Securities?

The legality of crypto airdrops in the US primarily depends on whether they are classified as securities under federal securities laws. The SEC uses the Howey Test, established in the 1946 Supreme Court case SEC v. W.J. Howey Co. (https://supreme.justia.com/cases/federal/us/328/293/), to determine if an asset is a security. The test has four criteria:

1. An investment of money
2. In a common enterprise
3. With an expectation of profits
4. Derived from the efforts of others

If an airdrop meets these criteria, it is considered a security and must be registered with the SEC or qualify for an exemption (e.g., crowdfunding, private placements, or limited offerings like Rule 504). Most airdrops, however, do not meet these exemption criteria, raising the risk of being deemed unregistered securities offerings.

SEC’s Historical Stance

The SEC has taken enforcement actions that shed light on its view of airdrops. In 2018, the SEC settled with Tomahawk Exploration LLC (https://www.sec.gov/files/litigation/admin/2018/33-10530.pdf), concluding that their bounty program—where tokens were distributed in exchange for promotional services like online marketing—constituted an offer and sale of securities. The SEC argued that non-monetary contributions, such as services, satisfied the “investment of money” prong of the Howey Test.

Similarly, in 1999, the SEC cracked down on “free stock” airdrops, settling enforcement actions against companies that offered stock for actions like signing up to websites (https://www.sec.gov/news/press-release/2018-152). The SEC’s then-Enforcement Director, Richard H. Walker, stated, “Free stock is really a misnomer in these cases. While cash did not change hands, the companies that issued the stock received valuable benefits.” This precedent suggests that airdrops providing benefits to issuers (e.g., increased user registrations or secondary market creation) may be scrutinized as securities.

Recent Developments and Challenges

In 2024, Beba and the DeFi Education Fund filed a lawsuit against the SEC, challenging the classification of their $BEBA token airdrop as a security (https://www.disruptionbanking.com/2024/04/03/sec-lawsuit-are-crypto-airdrops-securities/). They argued that the airdrop did not involve an investment of money or a common enterprise, as tokens were distributed freely without profit expectations tied to Beba’s efforts. This lawsuit reflects ongoing industry pushback against the SEC’s broad interpretation of securities laws.

Additionally, a 2023 ruling in the SEC’s case against Ripple provided some nuance. The court found that public sales of Ripple’s XRP token were not securities, but $728.9 million in institutional sales were unregistered securities offerings. This distinction suggests that the context of an airdrop—whether it’s broadly distributed or targeted—may influence its legal classification.

Crypto Airdrops are not Illegal in the U.S.

Crypto airdrops are not inherently illegal in the United States. However, the legal status depends on how the airdrop is conducted, the nature of the token, and compliance with U.S. securities, tax, and anti-money laundering (AML) laws.

Here’s what you need to know:

SEC Regulations and Securities Law

The U.S. Securities and Exchange Commission (SEC) evaluates whether tokens distributed via airdrops are securities under the Howey Test. If an airdropped token meets the criteria of an “investment contract,” it may be considered a security.

Key Points:

• The SEC has previously stated that airdropping a token can still be subject to securities laws if the token gives expectations of future profit or is used to build speculative interest.
• Even “free” tokens may fall under unregistered securities offerings if they’re distributed with marketing language suggesting profit potential or utility tied to a future platform.

Real Case Reference:
In the SEC v. Dropil case, the SEC pursued action against developers who distributed “free” tokens that later traded on public exchanges with profit expectations.

👉 Verdict: If the airdrop is promotional and the token resembles a security, it must be registered with the SEC or qualify for an exemption. Failure to do so could be illegal.

Tax Implications of Crypto Airdrops

Airdropped tokens are taxable income in the U.S. under IRS guidance.

According to IRS Notice 2019-24:

• If you receive a crypto airdrop, you must report the fair market value of the tokens as ordinary income at the time they are received and under your control.
• Even if the airdrop is unsolicited and you didn’t ask for it, you may still be liable if it hits your wallet.

Failure to report airdrops can lead to:

• Penalties
• Back taxes
• IRS audits

👉 Tip: Use crypto tax software like CoinTracker or Koinly to track and report airdrop income correctly.

AML & KYC Requirements

If you’re a U.S. project distributing tokens via airdrop, you may be required to:

• Collect Know Your Customer (KYC) data
• Comply with AML laws
• Prevent token access in sanctioned jurisdictions (like Iran, North Korea)

Distributing airdrops to U.S. persons without proper regulatory steps can expose a project to legal risks—even if unintentionally.

State-by-State Crypto Laws

While federal law governs securities and tax, some U.S. states have begun creating crypto-specific laws. For example:

• New York requires BitLicense compliance
• California has issued warnings about unregistered token distribution
• Texas has aggressively pursued illegal token offerings

👉 Always consult a crypto-savvy lawyer before conducting or participating in airdrops in the U.S.

How to Stay Compliant (For Projects and Users)

For Projects:

• Perform a legal review before launching an airdrop
• Avoid making claims of token appreciation
• Consider using non-U.S. jurisdiction if legal clarity is lacking
• Register your token or file for an exemption with the SEC if necessary

For Users:

• Be aware of tax liabilities
• Don’t assume airdropped tokens are “free money”
• Report all income correctly
• Avoid participating in airdrops from suspicious or anonymous projects

Tax Implications for Airdrop Recipients

Regardless of their status as securities, airdrops have clear tax implications in the US. The Internal Revenue Service (IRS) considers airdropped tokens as taxable income, requiring recipients to report their fair market value at the time of receipt as ordinary income (https://tokentax.co/blog/how-crypto-airdrops-are-taxed). For example, if a user receives tokens worth $1,000 during an airdrop, that amount is taxable as income. If the tokens are later sold, any gain or loss is subject to capital gains tax. This dual taxation (income tax upon receipt and capital gains tax upon disposal) adds a financial burden for participants.

Aspect	Details
Taxable Event	Receipt of airdropped tokens is considered ordinary income.
Valuation	Fair market value at the time of receipt must be reported.
Reporting	Reported as “other income” on Form 1040 Schedule 1.
Capital Gains	Selling or trading airdropped tokens triggers capital gains or losses.
Source	IRS guidance via TokenTax

Why Projects Exclude US Residents

Due to regulatory uncertainty, many crypto projects exclude US residents from airdrops to avoid potential SEC scrutiny. For instance, EigenLayer’s airdrop barred users from “prohibited jurisdictions” like the US, citing compliance with securities laws (https://www.coindesk.com/policy/2024/08/21/crypto-airdrops-ban-us-users-but-americans-are-claiming-tokens-anyway). Despite these restrictions, some US users bypass geoblocks using VPNs or other methods, highlighting the challenges of enforcement.

This practice has sparked frustration among US crypto enthusiasts, as seen in online discussions (https://www.reddit.com/r/cosmosnetwork/comments/18z90p8/is_there_anyway_we_can_vote_for_americans_to_be/). Some argue that receiving airdropped tokens is not illegal for individuals, as the legal burden falls on the issuer for distributing unregistered securities. However, participating in restricted airdrops carries risks, including potential regulatory consequences.

Ongoing Debates and Future Outlook

As of August 2025, the legality of crypto airdrops in the US remains a gray area. The SEC’s broad application of the Howey Test has led to enforcement actions, but industry advocates argue that not all airdrops should be classified as securities. For example, airdrops that are purely promotional, with no expectation of profit or reliance on a common enterprise, may fall outside the Howey Test’s scope.

Lawmakers are also seeking clarity. In September 2024, Representatives Patrick McHenry and Tom Emmer sent a letter to SEC Chair Gary Gensler, requesting guidance on the regulatory classification of digital asset airdrops (https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=409377). The outcome of lawsuits like Beba’s and future regulatory developments could set precedents for how airdrops are treated.

Industry experts, such as Brock Pierce, have highlighted that regulatory uncertainty stifles innovation, pushing crypto projects to jurisdictions with clearer rules. The lack of a comprehensive framework for airdrops underscores the need for updated regulations that balance investor protection with technological advancement.

Final Thoughts: Are Crypto Airdrops Worth the Risk in the U.S.?

While crypto airdrops are not illegal, they exist in a regulatory gray zone in the U.S. Compliance with securities law, taxation, and KYC/AML standards is critical. Both token issuers and recipients must tread carefully.

If you’re an investor in the U.S., it’s essential to report your airdrops for tax purposes and avoid tokens that might later be classified as unregistered securities. If you’re launching a project, consider legal counsel and structured tokenomics that avoid promising speculative gains.

Frequently Asked Questions

Is airdrop legal?

Yes, airdrops are legal in most countries as long as they comply with local financial and regulatory laws. They are typically used by crypto projects for marketing or token distribution. However, in some regions, tokens may be considered securities, requiring proper registration. It’s important for both issuers and recipients to understand the legal implications based on their local jurisdiction before participating in or conducting an airdrop.

Is crypto illegal in the USA?

Crypto is not illegal in the USA. Individuals and businesses can legally buy, sell, and trade cryptocurrencies. However, the industry is regulated by various agencies like the SEC, CFTC, and IRS. Certain activities, such as unregistered securities offerings or money laundering using crypto, are illegal. Users must comply with tax rules and KYC/AML regulations when using exchanges or launching crypto projects.

Are crypto airdrops haram?

Crypto airdrops may be considered haram or halal depending on their nature and purpose. If the airdrop involves gambling, interest (riba), or promotes haram projects, it would be considered haram in Islamic law. However, if it is given freely without conditions and the project is Sharia-compliant, it may be permissible. It’s best to consult a qualified Islamic scholar for a specific ruling based on the airdrop’s details.

Can I buy crypto in the USA?

Yes, you can legally buy crypto in the USA through licensed cryptocurrency exchanges such as Coinbase, Kraken, or Binance US. U.S. residents must follow regulations, including identity verification (KYC) and tax reporting. While buying and holding crypto is legal, users should be aware of federal and state laws, especially regarding securities, taxes, and anti-money laundering compliance. Always use regulated platforms to ensure safety and legal compliance.

Is crypto legal in the USA for international students?

Yes, crypto is legal in the USA for international students. They can legally buy, sell, and hold cryptocurrencies through regulated exchanges, just like U.S. citizens. However, they must follow the same rules, including identity verification (KYC), tax reporting, and compliance with U.S. financial regulations. It’s important for international students to keep records of their transactions and consult tax professionals if needed to stay compliant.

Which US state is crypto-friendly?

Wyoming is considered one of the most crypto-friendly U.S. states. It has passed several pro-crypto laws, recognizes decentralized autonomous organizations (DAOs), and offers a favorable regulatory environment for blockchain businesses. Other crypto-friendly states include Texas, which supports mining and blockchain innovation, and Florida, known for promoting crypto use in government and business. These states aim to attract crypto companies with supportive policies and clear legal frameworks.