Is Crypto a Property, Security, or Commodity?

You might be surprised to learn that the IRS, SEC, and CFTC all have different takes on what cryptocurrencies are—some say property, others see them as securities or commodities. But why does it matter? The way these assets are categorized directly impacts how they’re taxed and regulated. In this article, we'll break down these differences and what they mean for crypto investors, traders, and businesses.

Is crypto property?

If you ask the IRS - then yes, crypto is property.

For tax purposes, the IRS classifies all digital currencies, including cryptocurrencies, non-fungible tokens (NFTs), and stablecoins, as property. You might think of cryptocurrency as a form of money, but in the eyes of the IRS, it’s property much like real estate or stocks. This distinction is critical because it means that every time you sell or trade your crypto, you're potentially creating a taxable event.

So, how are taxed calculated on crypto?

The IRS requires you to report income when you receive crypto, whether it's through mining, staking, or even as payment for services. Additionally, if you sell your crypto for more than what you originally paid (your cost basis), you’ll owe capital gains taxes on the profit.

For instance, if you bought Bitcoin at $10,000 and sold it at $20,000, you’ll be taxed on the $10,000 gain. This is similar to how the IRS taxes stock sales. But with crypto, the water gets murkier when you start dealing with more complex transactions, like moving tokens between blockchains. For now, the IRS hasn’t fully clarified how all these scenarios should be taxed, leaving some room for interpretation.

Read next: Can the IRS track crypto?

Are cryptocurrencies securities?

If you ask the SEC, then yes, some crypto tokens are securities while others are properties.

The SEC has a slightly different perspective. To them, not all crypto is the same. They believe that many cryptocurrencies, especially those involved in Initial Coin Offerings (ICOs), should be classified as securities. Why? Because ICOs often allow projects to raise funds in exchange for tokens, which closely resembles how companies issue stock to investors.

The SEC uses something called the Howey Test to determine if an asset is a security. According to this test, an asset is considered a security if:

• There’s an investment of money

• The investment is in a common enterprise

• There's an expectation of profit from the efforts of others

Many ICOs pass this test, meaning they need to comply with strict registration and reporting requirements like stocks or bonds. However, applying this test to decentralized projects (where no single entity or enterprise exists) is tricky, making the SEC’s role in crypto regulation a hot topic. As crypto evolves, many decentralized tokens operate in a gray area, leaving their classification uncertain.

Read next: SEC & Crypto

Are cryptocurrencies commodities?

If you ask the CFTC, then yes, all cryptocurrencies are commodities. 

The IRS and SEC aren't the only authorities interested in crypto. The Commodity Futures Trading Commission (CFTC) steps in when cryptocurrencies are traded as commodities. In their eyes, all cryptocurrencies fall under this category, just like gold or oil.

While the CFTC doesn’t regulate the buying and selling of crypto directly (that’s the spot market), they do have jurisdiction over derivatives—such as futures contracts. So, when companies started launching Bitcoin futures contracts, the CFTC got involved. They ensure that these products comply with regulations and help prevent fraud in interstate trading.

In addition to regulating futures and derivatives, the CFTC has a say when there’s fraud involving crypto or when exchanges fail to follow proper procedures. However, they’ve faced scrutiny, especially after high-profile cases like the collapse of FTX.

Read next: Bitcoin futures and how to trade them

So, who’s actually in charge?

With three agencies each claiming some regulatory authority over different aspects of crypto, it can be confusing to know who’s calling the shots. As we’ve seen, the IRS, SEC, and CFTC all have different ideas about what crypto is and how it should be regulated.

The reality is that the answer isn’t straightforward, and many companies face the challenge of complying with rules from all three agencies. To make matters more complicated, enforcement actions are picking up. After the FTX collapse, regulators have put more pressure on crypto firms to follow stricter guidelines.

Read next: US Crypto Tax Guide

What are other countries doing?

While U.S. regulators struggle to figure out how to classify and regulate crypto, Europe has taken a more comprehensive approach with the Markets in Crypto Act (MiCA). This new legislation lays out clear rules for crypto platforms, traders, and token issuers, focusing on increasing transparency and protecting consumers.

Some of the key aspects of MiCA include:

• Stablecoins: Issuers must hold sufficient reserves to meet withdrawal requests during times of stress.

• Environmental impact: Crypto companies must disclose their energy consumption, addressing concerns over the environmental toll of crypto mining.

• Liability: Platforms could be held liable if they lose investors' funds due to negligence.

Experts believe MiCA could serve as a model for future U.S. regulations, as it aims to balance innovation with consumer protection.

What does this mean for crypto investors?

In short, the way cryptocurrencies are classified determines how they’re taxed and regulated, which can have a huge impact on your wallet. The IRS considers all crypto to be property, so be prepared to pay Income Tax and Capital Gains Tax on your crypto transactions. 

Meanwhile, the SEC views certain crypto projects, particularly ICOs, as securities, which means they’re subject to more stringent regulations. And lastly, the CFTC sees crypto as a commodity, stepping in primarily when it comes to futures and derivatives.

Staying compliant with these varying regulations can be tough, but platforms like Koinly make it easier by helping you aggregate your transactions, calculate gains or losses, and generate the necessary tax forms. Try Koinly free today.