Are Cryptocurrencies Securities? Bitcoin, Ethereum, XRP, Stablecoins

Whether cryptocurrencies are securities depends on the token and how it was sold. Bitcoin is treated as a commodity. Ethereum is largely treated the same way. Many other tokens — especially those launched through fundraising events where buyers relied on a development team to build the network — can qualify as securities under federal law. The word “cryptocurrency” appears nowhere in the securities statutes, so classification turns on a decades-old legal test that looks at the economic reality of the sale.¹

That distinction matters. Whether a token is a security affects how it can be traded, who is allowed to sell it, what tax forms you receive, and whether the wash sale rule applies to your losses.

The Howey Test Is the Standard

The rule comes from a 1946 Supreme Court case about Florida citrus groves. Buyers purchased land strips and signed service contracts letting the seller tend the groves and split the profits. The Court held this was an “investment contract” — a security — because it met four conditions: buyers invested money, in a common enterprise, expecting profits, from the efforts of others.²

The Court wrote the test to focus on substance, not labels. It does not matter whether you pay in dollars, bitcoin, or another token, and it does not matter whether the seller calls its product a “utility token,” a “governance token,” or a “cryptocurrency.” If all four conditions are present, the arrangement is a security.

Applied to digital assets, the four prongs look like this:

Investment of money: you exchange something of value for the new token.
Common enterprise: your financial outcome is tied to other buyers or to the project’s promoters, either because funds are pooled or because your returns move with the promoter’s efforts.³
Expectation of profits: you buy hoping the token’s value will rise, not because you plan to use it immediately for a specific purpose.
Efforts of others: you rely on a development team, foundation, or promoter to build the network and drive demand, rather than doing that work yourself.

The SEC’s own framework mirrors this analysis and puts the heaviest weight on the fourth prong. Signs a token likely is a security include a network still under development, a team that controls token supply or price through buybacks and burns, centralized governance, and marketing that emphasizes potential price increases rather than a working use. Signs pointing the other way include a token priced to reflect actual use in a functioning network, supply matched to expected consumption, and no core team on whose ongoing efforts the value depends.³

Where the Major Cryptocurrencies Stand

Bitcoin

Bitcoin is treated as a commodity, not a security, by both the SEC and the CFTC. It was never sold through a fundraising event, no central team controls the protocol, and the network has run independently since 2009. The SEC reinforced that treatment when it approved exchange-traded products holding spot bitcoin under commodity-based trust share listing standards.⁴

Ethereum

Ethereum’s status has been debated for years, but the direction of travel points to commodity treatment. In a 2018 speech, then-SEC Director William Hinman cited Ethereum as an example of a network that had reached “sufficient decentralization,” meaning buyers could no longer reasonably expect a specific person or group to drive the token’s value.⁵ The SEC later approved spot Ethereum exchange-traded products under the same commodity-based framework it uses for Bitcoin. No enforcement action has treated ether as a security.

XRP

XRP is the case that shows a single token can be a security in one sale and not in another. The SEC sued Ripple Labs in December 2020, alleging unregistered securities offerings. The district court split the analysis: direct sales to institutional investors were unregistered investment contracts because those buyers knew they were funding Ripple’s business and expected to profit from its work. Secondary sales on public exchanges did not meet the same criteria, because retail buyers typically did not know whether their payment reached Ripple or another trader.⁶

The case settled in 2025. The original $125 million civil penalty was reduced to $50 million, the injunction was dissolved, and both sides dismissed their appeals.⁷ The ruling still stands for the proposition that the same token can carry different classifications depending on how it changed hands.

Stablecoins

Congress addressed stablecoins directly in the GENIUS Act, signed into law on July 18, 2025. The law creates a regulatory framework for “payment stablecoins” — tokens designed to hold a stable value and function as a medium of exchange — and places them under banking-style oversight rather than the securities laws.⁸ Yield-bearing stablecoins are a different story. If an issuer pools buyer funds, invests them, and passes returns to holders, that arrangement looks like an investment contract and is more likely to be treated as a security.

How a Token Can Stop Being a Security

A token that starts as a security can lose that status if the network becomes sufficiently decentralized. The reasoning is that once no identifiable group is driving value, the “efforts of others” prong falls away.⁵

A network is generally not there yet if a founding group’s work still plays a significant role in maintaining it, the promoter holds a large stake with an incentive to raise price, the promoter continues spending raised funds to grow the ecosystem, meaningful information gaps remain between the promoter and public buyers, or few outsiders exercise real governance influence. Factors pointing the other way include independent actors setting price, supply matched to user needs, wide distribution across users, and a fully functional application no longer dependent on a core team.⁵

Calling a project “decentralized” does not make it so. The founding team has to genuinely relinquish control over governance, development, and treasury spending.

Crypto Interest Accounts Are a Separate Question

Platforms that accept crypto deposits and pay interest face a different but related analysis. The SEC uses the Reves “family resemblance” test, which presumes a note is a security unless it fits one of the categories courts have excluded, such as ordinary consumer loans.

The SEC applied that test to BlockFi’s interest-bearing accounts and concluded they were securities: depositors were motivated by promised returns, the product was sold as an investment to more than half a million people, and no other regulatory scheme reduced the risk enough to make securities registration unnecessary. Any platform offering yield on crypto deposits should expect the same analysis. The pressure points are whether depositor funds are pooled and invested, whether returns are promised or implied, and whether the product is marketed as an investment to a broad audience.

What Security Classification Changes for Your Taxes

Starting with sales in 2026, brokers must file Form 1099-DA for digital asset transactions. Every broker reports gross proceeds. Whether the broker also reports your cost basis depends on whether the token is a “covered security,” which turns on whether it is treated as a security under federal law.⁹

For covered securities, brokers report the date acquired, the cost basis, and the gain or loss — the same information you receive for stock sales. For noncovered securities, brokers report only gross proceeds, and you remain responsible for tracking your own basis and reporting gains or losses accurately.¹⁰

Security status also affects the wash sale rule. Selling a covered security at a loss and repurchasing a substantially identical asset within 30 days disallows the loss and adds it to the basis of the replacement.¹¹ For tokens that are not securities, the wash sale rule has not historically applied, though policymakers have recommended extending it to all digital assets. If you trade tokens classified as securities, plan around the same wash sale restrictions that apply to stocks.

What It Changes for Issuers and Platforms

If a token qualifies as a security, selling it without registration violates Section 5 of the Securities Act of 1933, unless the sale fits an exemption such as Regulation D (private placements, mostly to accredited investors) or Regulation A (a scaled-down public offering up to $75 million).¹²

Trading platforms carry their own obligation. A platform matching buyers and sellers of security tokens functions as an “exchange” under federal law and must register as a national securities exchange or operate as an Alternative Trading System, which itself requires registering as a broker-dealer and joining a self-regulatory organization. Calling a venue a “decentralized exchange” does not remove that obligation.¹³

Consequences for getting the classification wrong reach both sides of the ledger. The SEC can seek disgorgement of profits, permanent injunctions, and substantial monetary penalties, and investors in an unregistered offering can demand rescission — their money back with interest. Ripple’s original $125 million civil penalty, later reduced to $50 million in settlement, shows the scale.⁷ Criminal exposure is separate. Securities and commodities fraud carries up to 25 years in federal prison, though those charges typically require intentional deception rather than a good-faith failure to register.¹⁴

What Is Changing Next

The rules are still moving. The SEC has stood up a Crypto Task Force, led by Commissioner Hester Peirce, to draw clearer lines between securities and non-securities and to build practical registration paths for crypto assets and platforms.¹⁵ The Digital Asset Market Clarity (CLARITY) Act passed the House in July 2025 and is pending in the Senate. If enacted, it would give the CFTC exclusive jurisdiction over spot markets for “digital commodities” while leaving the SEC’s authority over tokens that function as securities in place, replacing today’s case-by-case enforcement analysis with a statutory test.

Until Congress acts, the classification of any given token still runs through the Howey Test and the SEC’s framework, applied to the specific facts of how the token was created, marketed, and sold. Projects that raised money through token sales to fund development, promised returns, or held onto centralized control face the highest risk of security classification. Tokens with functional networks, broad user bases, and no reliance on a founding team’s ongoing efforts stand on the firmest ground to avoid it.

1
Office of the Law Revision Counsel. 15 U.S. Code 77b – Definitions
2
Justia U.S. Supreme Court Center. SEC v. W.J. Howey Co., 328 U.S. 293 (1946)
3
U.S. Securities and Exchange Commission. Framework for Investment Contract Analysis of Digital Assets
4
U.S. Securities and Exchange Commission. SEC Approves Generic Listing Standards for Commodity-Based Trust Shares
5
U.S. Securities and Exchange Commission. Digital Asset Transactions: When Howey Met Gary (Plastic)
6
U.S. Securities and Exchange Commission. Statement on the Agency’s Settlement with Ripple Labs, Inc.
7
U.S. Securities and Exchange Commission. Litigation Release No. 26306
8
Office of the Comptroller of the Currency. GENIUS Act Regulations: Notice of Proposed Rulemaking
9
IRS.gov. href=”https://www.irs.gov/pub/irs-dft/i1099da–dft.pdf” target=”_blank” rel=”noopener”>2026 Instructions for Form 1099-DA Digital Asset Proceeds From Broker Transactions
10
IRS.gov. 2026 Instructions for Form 1099-DA Digital Asset Proceeds From Broker Transactions
11
Internal Revenue Service. Instructions for Form 1099-B (2026)
12
U.S. Securities and Exchange Commission. Exempt Offerings
13
U.S. Securities and Exchange Commission. Statement on Potentially Unlawful Online Platforms for Trading Digital Assets
14
Office of the Law Revision Counsel. 18 USC 1348 – Securities and Commodities Fraud
15
U.S. Securities and Exchange Commission. Crypto Task Force