Uniswap may be fined at least $540M for its airdrop by the IRS

By ScreenTag | The Other Side | 14 Feb 2022


Uniswap may be be facing a huge tax bill for the airdrop took place from September 2020, until May 2021 - totaling at least $370M in withheld taxation, plus at least $170M in fines. This may come on top of the result of the SEC ongoing investigation. How did they get in that mess? Read on!

As US taxpayers very well know, anyone who is receiving non salaried income, has to include a number of 1099-XXX forms, depending on the number of sources of such income. In case you didn't know - and you most probably not, because Uniswap is making it impossible to find out this information in their websites - Uniswap is developed and operated by a for profit Delaware corporation under the name Unified Navigation Inc. As a US taxpayer, they should have submitted to each of the recipients of their airdrop a 1099 form, since the value of the airdrop for each account at the time of distribution was over $600, stating the value of the tokens distributed. The thing is that you cannot submit an anonymous 1099 form. And with Uniswap not caring to comply with KYC/AML, they couldn't know who the recipients of their airdrop were. With over 315,000 accounts (see source) receiving those 400 UNI, this makes us at least $157M in late/no 1099 filing fines (315,000 x $500). And that's just to warm up!

For 1099 recipients with unverified/wrong taxpayer identification, or foreign taxpayers, Uniswap should have applied a 30% tax withholding, and distribute the remaining amount. As per the tax legislation, those 400 UNI received by each recipient is the net amount each should have received, and some 171.5 UNI is the tax that should have been withheld. With no tax information in hand, such withholding should have been applied to all 315,000 recipients, which makes us some 54,022,000 UNI. With the minimum UNI price at $3.44, the amount to be withheld should be at least $186M - but taking under consideration the price skyrocketing at over $8.50, by the end of December, it's safe to double that amount, to $373M (and this calculation contains data only until December 31st of that year).

Could they have avoided such a hefty fine? They certainly could! But their arrogance didn't let them explore available options. Here is how they could have done it:

1. They could keep the distribution going, until UNI had started trading: This would make it a zero amount distribution for tax purposes, since there would be no public market to price the tokens, and UNI has no face value.

2. They could be adjusting the volume of distributed tokens, at under $500 in value per recipient: This would have kept the distribution well under the $600 threshold.

3. They could have set a pre-agreed value per UNI token, well before the airdrop had started, at $1.25 Any sale on the exchange above this price would be subject to capital gains tax.

Arrogance is a very costly habit. It's time for some players is the crypto business to find that out the hard and painful way.

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