Fungible tokens are digital assets whose units are all identical and interchangeable, so one unit can be swapped for another of the same type without any change in value. Bitcoin and Ether are the best-known examples: any one bitcoin is worth the same as any other, and the network treats them as equivalent regardless of history. The idea is the same one that lets a dollar bill in your pocket buy exactly what a dollar bill in someone else’s pocket buys, but blockchains give it a precise technical framework and specific tax and regulatory consequences you need to know about before you buy, sell, or earn them.
What Makes a Token Fungible
Two mechanical properties do the work: divisibility and uniformity.
Divisibility means the token can be broken into fractions, and each fraction holds its proportional share of value. Bitcoin is divisible to eight decimal places, Ether to eighteen. That’s what allows small payments and lets someone participate in the market without buying a whole unit.
Uniformity means every unit is qualitatively identical. There are no serial numbers or distinguishing marks that would make one unit more desirable than another. Exchanges can quote a single price, and wallets and applications can treat every unit the same way.
If a token acquires a unique characteristic, such as attached artwork or metadata tied to a specific unit, it becomes a non-fungible token (NFT) and is no longer freely substitutable. The rules governing token issuance on a blockchain are what keep units from drifting apart in this way.
Everyday and Digital Examples
Fiat currency is the most familiar fungible asset. Under federal law, U.S. coins and currency are legal tender for all debts, taxes, and public charges, which means every unit is treated as equal for settling obligations.1Office of the Law Revision Counsel. 31 USC 5103 – Legal Tender Commodities like gold and oil work the same way; they trade based on grade rather than the identity of the specific bar or barrel.
On blockchains, the prominent fungible tokens include:
- Bitcoin (BTC), the largest cryptocurrency by market capitalization, where every unit is equal to every other.
- Ether (ETH), the native token of Ethereum, used as a medium of exchange and to pay network fees.
- Stablecoins such as USDC and USDT, designed to hold a stable value, typically pegged one-to-one to the U.S. dollar.
- Governance tokens like UNI and AAVE, which grant voting rights in decentralized protocols, with each unit carrying the same vote and price as any other.
What ties these together is the same trait that defines a dollar bill: what matters is how many you hold, not which specific ones.
The Technical Standards That Enforce Fungibility
Smart contracts, which are self-executing programs stored on a blockchain, enforce the rules that keep tokens interchangeable. When someone creates a new token, the contract defines how units are issued, transferred, and tracked, and because every unit follows the same instructions, none can develop traits that separate it from the rest of the supply.
ERC-20 on Ethereum
The most widely used blueprint is Ethereum’s ERC-20 standard, first proposed in 2015 and formally adopted in 2017. It specifies a set of functions every compliant token must support, including tracking total supply, checking balances, and approving transfers.2Ethereum Improvement Proposals. ERC-20 Token Standard Because every ERC-20 token follows the same rules, any Ethereum wallet or decentralized exchange can interact with them. Thousands of tokens, including USDC, UNI, and AAVE, run under this standard.
Other Blockchain Standards
Ethereum isn’t the only chain with a token standard. Solana uses SPL, which serves a similar purpose but is designed for Solana’s own virtual machine and is typically written in Rust rather than Ethereum’s Solidity. Unlike ERC-20, which covers only fungible tokens, SPL applies to both fungible and non-fungible tokens. BNB Chain, Avalanche, and Polygon have their own standards, many modeled closely on ERC-20.
Deploying a new contract on Ethereum requires paying a network “gas fee” to the validators who record it. Fees move with network congestion. As of 2025, deploying a basic ERC-20 contract typically costs between $100 and $500 on the Ethereum mainnet, and spikes during heavy demand.
How the IRS Taxes Fungible Tokens
The IRS treats all digital assets, including fungible tokens, as property rather than currency for federal tax purposes.3Internal Revenue Service. Notice 2014-21 That classification is the fact almost every other tax rule flows from. Every sale, exchange, or disposal can trigger a taxable gain or loss, similar to selling a stock.
Capital Gains
Hold a token for more than a year before selling and any profit is taxed at long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income and filing status. Tokens held for a year or less generate short-term gains, taxed at your ordinary income rate.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses The bracket thresholds are adjusted annually for inflation, so check the current IRS guidance when you file.
Staking Rewards
If you earn additional tokens by staking, which means locking tokens to help validate transactions on a proof-of-stake blockchain, those rewards are ordinary income. Under Revenue Ruling 2023-14, you must include the fair market value of the rewards in your gross income for the year you gain control over them, measured in U.S. dollars at the time you receive them.5Internal Revenue Service. Revenue Ruling 2023-14 That value also becomes your cost basis if you later sell.
Reporting
Every federal income tax return now carries a yes-or-no question asking whether you received, sold, exchanged, or otherwise disposed of any digital asset during the year, and you must answer it whether or not a broker sent you a form.6Internal Revenue Service. Digital Assets
Starting with transactions in 2025, digital asset brokers must report dispositions on a new Form 1099-DA, with copies sent to both taxpayers and the IRS.7Internal Revenue Service. Reminders for Taxpayers About Digital Assets Most brokers are not required to include cost basis information for 2025 transactions, so you’ll need to calculate your own basis to determine gain or loss. Brokers must begin reporting basis for certain transactions on sales occurring on or after January 1, 2026. If you receive tokens as payment for goods or services in a business, that income is taxed as ordinary income and reported on Schedule C.
Which Regulator Has Jurisdiction
Fungible tokens don’t fit into a single regulatory box. Different federal agencies claim oversight depending on how a token is created, marketed, and used.
The SEC and the Howey Test
The Securities and Exchange Commission evaluates whether a token qualifies as a security, specifically an investment contract, using the framework from the Supreme Court’s 1946 decision in SEC v. W.J. Howey Co. A token is likely a security if buyers invest money in a common enterprise with an expectation of profits derived primarily from someone else’s efforts.8U.S. Securities and Exchange Commission. Framework for Investment Contract Analysis of Digital Assets Many token launches, where a team raises funds by selling tokens and promises to build a platform, meet all four prongs, and issuers who fail to register can face enforcement, civil penalties, and disgorgement.9U.S. Securities and Exchange Commission. SEC Charges Crypto Companies TrustToken and TrueCoin With Defrauding Investors Regarding Stablecoin Investment Program
The CFTC and Commodity Classification
The Commodity Futures Trading Commission treats certain fungible tokens as commodities under the Commodity Exchange Act. Federal courts have found that Bitcoin and Ether fall within the statutory definition because they are exchanged in a market for a uniform quality and value.10Commodity Futures Trading Commission. Digital Assets That classification gives the CFTC authority over derivatives tied to these tokens and jurisdiction to pursue fraud in spot markets.
Anti-Money-Laundering Rules
The Bank Secrecy Act requires financial institutions to file reports on cash transactions above $10,000 in a single day.11Financial Crimes Enforcement Network. The Bank Secrecy Act Businesses that facilitate digital asset transfers may need to register as money transmitters at the federal level and obtain state-by-state licenses, each with its own application fees and compliance costs.
Why the Usual Safety Nets Don’t Apply
Holding fungible tokens carries risks that don’t exist with a bank deposit or a brokerage account, mostly because the standard federal protections don’t reach them.
FDIC deposit insurance does not cover digital assets. If a crypto exchange or custodian fails, your tokens are not protected the way a bank deposit would be.12Federal Deposit Insurance Corporation. Fact Sheet – What the Public Needs to Know About FDIC Deposit Insurance and Crypto Companies SIPC protection, which normally covers securities held at a failed broker-dealer, does not extend to non-security crypto assets. Even tokens that might qualify as investment contracts are excluded from SIPC coverage unless they are the subject of a registration statement filed under the Securities Act of 1933.13U.S. Securities and Exchange Commission. Frequently Asked Questions Relating to Crypto Asset Activities and Distributed Ledger Technology
Private key management adds another layer of risk. Hold tokens in a personal wallet and lose access to your private key, and there is no bank to call, no password reset. The tokens tied to that key are effectively gone. Before choosing where to store fungible tokens, be clear that the legal protections you rely on for traditional financial accounts don’t carry over.