Whether a cryptocurrency is a security or a commodity comes down to how it was created, how it was sold, and whether buyers are counting on someone else’s work to make the token go up. Bitcoin is treated as a commodity by federal regulators. Most tokens sold through fundraising campaigns get pulled toward the “security” label under a Supreme Court test from 1946. Stablecoins backed by real reserves sit outside both buckets under recent SEC staff guidance. The label matters because it decides which federal agency has authority, which tax rules apply, and what legal exposure the issuer and the trading platform carry.
The Howey Test Pulls Most Tokens Toward “Security”
The Securities Act of 1933 defines a “security” broadly enough to cover not just stocks and bonds but also an “investment contract.”1Office of the Law Revision Counsel. 15 USC 77b – Definitions That last category is what sweeps in digital tokens. The Supreme Court set the four-part test in SEC v. W.J. Howey Co., and the SEC has used it in every crypto enforcement action since.
Howey asks four questions about the economic reality of a deal, no matter what the seller calls it:
- Is there an investment of money, crypto, or anything else of value? In a token sale, yes.
- Is there a common enterprise, meaning the buyer’s fate is tied to other investors or to the project itself?
- Do buyers expect to profit, through price appreciation or distributions, rather than just using the token?
- Do those profits depend mainly on the efforts of a founding team or other central group?
If all four are met, the token is a security. The issuer then has to register it with the SEC or fit into an exemption before selling to the public. Selling an unregistered security violates Section 5 of the Securities Act, which forbids using interstate commerce or the mails to offer securities without a registration statement on file.2Office of the Law Revision Counsel. 15 USC 77e – Prohibitions Relating to Interstate Commerce and the Mails The SEC can obtain orders halting sales, force the return of investor money, and impose civil penalties.
One important point for anyone holding a token: the Howey answer is not permanent. A coin can start as a security and stop being one later if its network becomes genuinely independent of its creators. That transition is where most of the legal uncertainty in crypto lives.
What Makes a Digital Asset a Commodity Instead
The Commodity Exchange Act defines “commodity” to cover not just agricultural products and natural resources but also “all other goods and articles” and “all services, rights, and interests” in which futures contracts are traded.3Office of the Law Revision Counsel. 7 USC 1a – Definitions The CFTC has relied on that language since 2015 to treat virtual currencies as commodities.
A digital asset looks like a commodity when no central team controls its value or its ongoing development. The price moves on open-market supply and demand, the way gold or oil does. No one is filing quarterly reports. No one is promising future returns. The CFTC does not run a registration regime for spot commodity trading the way the SEC does for stock exchanges. Its main authority is over derivatives, meaning futures, options, and swaps. But the CFTC can still pursue fraud and manipulation in any commodity transaction in interstate commerce, including on the spot market.
Where the Major Coins Stand
Bitcoin
Bitcoin is the clearest case. The CFTC and multiple federal courts have treated it as a commodity, and the SEC has never argued otherwise.4CFTC. Bitcoin Basics There was no pre-mine, no initial coin offering, and no identifiable team that still runs the network. Satoshi Nakamoto disappeared years ago. Bitcoin futures trade on regulated venues like the CME under CFTC oversight.
Ethereum
Ethereum is murkier. In a 2018 speech, then-SEC Director of Corporation Finance William Hinman said that “current offers and sales of Ether are not securities transactions” because the network had become sufficiently decentralized.5U.S. Securities and Exchange Commission. Digital Asset Transactions: When Howey Met Gary (Plastic) That speech was never formal guidance, and Ethereum’s 2022 move to proof-of-stake reopened the argument, since holders now lock up tokens and earn rewards.
As of early 2026, the SEC has not formally classified ether as a security or brought an enforcement action treating it as one. The CFTC’s Digital Assets Pilot Program, launched in December 2025, accepted ether as eligible collateral in derivatives markets, which lines up with the CFTC’s view that ETH functions as a commodity. The SEC’s Crypto Task Force, created in 2025, is working on the broader question of where the lines should sit.6U.S. Securities and Exchange Commission. Crypto Task Force
Stablecoins
Dollar-pegged stablecoins have their own lane. In April 2025, the SEC’s Division of Corporation Finance analyzed “Covered Stablecoins” under the Reves “family resemblance” test and concluded that stablecoins backed by adequate reserves and paying no interest or yield are not securities, because buyers are not motivated by expected returns.7U.S. Securities and Exchange Commission. Statement on Stablecoins The Division declined to address yield-bearing stablecoins, which remain in limbo.
Congress moved next. The GENIUS Act gives the Comptroller of the Currency authority to regulate nonbank stablecoin issuers at the federal level, while letting issuers with $10 billion or less in market capitalization opt into state-level regulation if the state framework is substantially similar to the federal one.8Congress.gov. S.394 – GENIUS Act of 2025 The OCC began implementing rulemaking in March 2026.9Federal Register. Implementing the GENIUS Act for Stablecoin Issuance by OCC-Regulated Entities
The Ripple Split
The Ripple case produced one of the most consequential rulings in crypto law. In July 2023, a federal court found that Ripple’s direct sales of XRP to institutional investors were securities transactions, but its programmatic sales on exchanges were not. The court specifically declined to decide whether secondary-market trading of XRP is a securities transaction.10United States District Court Southern District of New York. SEC v. Ripple Labs, Inc. – Order on Summary Judgment The same token can be a security in one context and not in another, depending on how and to whom it was sold.
Which Agency Regulates Which
The SEC has authority over any digital asset that meets the definition of a security. Its tools include mandatory registration of public offerings, ongoing disclosure obligations, and regulation of trading platforms that list securities. The CFTC oversees derivatives markets for digital commodities and can pursue fraud in spot commodity transactions, but it does not require registration for spot-market trading the way the SEC does for securities.
The SEC’s Crypto Task Force has said its goals are drawing “clear regulatory lines,” distinguishing securities from non-securities, and creating “realistic paths to registration.”6U.S. Securities and Exchange Commission. Crypto Task Force In the 119th Congress, the Digital Asset Market Clarity Act of 2025 proposed a framework for how digital commodities would be divided between the two agencies.11Congress.gov. H.R.3633 – Digital Asset Market Clarity Act of 2025
States sit behind both. Federal securities law generally preempts state-level registration for “covered securities” traded on national exchanges, but states keep full authority to investigate and prosecute fraud. For tokens outside that carve-out, state blue sky laws can impose their own registration and disclosure requirements.
How the Classification Changes Your Tax Bill
The IRS treats all digital assets as property, so any sale is a taxable event. But the type of product decides which rules apply.
Crypto futures traded on a regulated U.S. exchange qualify as Section 1256 contracts. Gains and losses are “marked to market” at year-end, meaning you owe tax on unrealized gains even if you never closed the position. In return you get a blended rate: 60% long-term capital gain and 40% short-term, regardless of holding period.12Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market For a high-bracket taxpayer, that blend can be much cheaper than ordinary short-term rates.
Spot crypto sales follow standard capital gains rules. Hold a year or less, gains are short-term and taxed as ordinary income. Hold longer, and long-term rates apply. Every sale, swap, or crypto-for-crypto trade is a separate reportable event on Form 8949.
The reporting picture changed on January 1, 2026. For sales after that date, crypto brokers must report gross proceeds on Form 1099-DA. Brokers also have to report cost basis for digital assets that qualify as “covered securities” — assets acquired after 2025 in a custodial account.13Internal Revenue Service. 2026 Instructions for Form 1099-DA Tokens acquired before 2026 are “noncovered,” and brokers may report basis voluntarily. If you bought crypto earlier, you are still on the hook for tracking and reporting your own basis.14Internal Revenue Service. Instructions for Form 8949 The IRS is now getting the same transaction feed from crypto exchanges that it already gets from stock brokers.
What Issuers and Trading Platforms Have to Do
A platform that matches buy and sell orders for tokens classified as securities has to register as a national securities exchange or run as an Alternative Trading System under Regulation ATS. An ATS first registers as a broker-dealer, then files operational disclosures on Form ATS or Form ATS-N covering onboarding, trading, and settlement.15U.S. Securities and Exchange Commission. FAQs Relating to Crypto Asset Activities and Distributed Ledger Technology Custody adds another layer: in December 2025, SEC staff outlined conditions for a broker-dealer to claim “physical possession” of crypto securities under the customer protection rule, including assessing the underlying blockchain, protecting private keys, and having written plans for events like hard forks and 51-percent attacks.16U.S. Securities and Exchange Commission. Statement on the Custody of Crypto Asset Securities by Broker-Dealers
Not every token offering needs full registration. Common exemptions include:
- Regulation D, Rule 506(b), which allows an unlimited raise from accredited investors plus up to 35 non-accredited investors meeting a sophistication standard, with no general advertising.17U.S. Securities and Exchange Commission. Private Placements – Rule 506(b)
- Regulation A+, with Tier 1 up to $20 million in a 12-month period, and Tier 2 up to $75 million but requiring audited financials and capping non-accredited investor contributions. Tier 2 preempts state registration.18U.S. Securities and Exchange Commission. Regulation A
- Regulation Crowdfunding, up to $5 million in a 12-month period through a registered funding portal, with per-investor limits based on income and net worth.19U.S. Securities and Exchange Commission. Regulation Crowdfunding
These exemptions do not change the token’s classification. They only let the issuer sell it without full registration. Anti-fraud rules still apply, and the issuer still owes buyers material information. Miss the conditions of the chosen exemption and the offering is unregistered, with the same enforcement exposure as if no exemption had been claimed.
Penalties for Guessing Wrong
Selling an unregistered security carries severe consequences on both sides. On the civil side, the SEC can obtain orders halting sales, force disgorgement of investor funds, and impose monetary penalties. Individuals can be permanently barred from serving as officers or directors of public companies.
Criminal exposure goes further. Securities fraud under the Securities Exchange Act carries up to 20 years in prison. A Securities Act violation carries up to five years. Wire fraud, which prosecutors routinely add because nearly every crypto transaction runs over the internet, carries its own 20-year maximum.20Office of the Law Revision Counsel. 18 USC 1343 – Fraud by Wire, Radio, or Television These charges are often stacked. The CFTC has its own civil enforcement powers over manipulation and fraud in commodity markets, and the Department of Justice can bring parallel criminal cases.
SEC enforcement posture shifted in 2025, with the agency pausing, reducing, or dismissing a significant share of pending crypto cases. The underlying statutes have not changed. A lighter enforcement hand today is not a repeal, and the classification question is the same question it was before the shift.