Cryptocurrency

A cryptocurrency is a digital representation of value recorded on a cryptographically secured distributed ledger, transferable between parties without a bank or government standing in the middle. FINRA groups these under the broader label "crypto assets", meaning any asset issued or transferred using distributed ledger or blockchain technology, and notes that the same things get called digital assets, virtual assets, virtual currencies, coins, tokens and cryptocurrencies depending on who is writing.

The word "currency" in the name is the first thing to set aside. The IRS states that for US federal tax purposes digital assets are considered property, not currency, and the tax rules follow from that. The formal definition federal tax law now uses is broader still. Treasury Regulation section 1.6045-1(a)(19)(i) defines a digital asset as "any digital representation of value that is recorded on a cryptographically secured distributed ledger (or any similar technology), without regard to whether each individual transaction involving that digital asset is actually recorded on that ledger, and that is not cash". Nothing in that sentence requires the asset to function as a medium of exchange, so non-fungible tokens and tokenized securities fall inside it alongside bitcoin.

The most useful thing to understand about this category is that it has no single regulator, and that this is a consequence of how the law was built rather than an oversight. FINRA puts the position directly: a particular crypto asset or crypto asset transaction may be a security, a commodity or another asset type such as property under applicable law, and whether it is a security depends on whether it meets the definition of a security under federal securities law, judged by tests drawn from court cases. So the same token can be analyzed one way for tax, another for securities law and a third for commodities law, and the answers do not have to agree. The tax regulation is explicit about this. Immediately after defining a digital asset, section 1.6045-1(a)(19)(ii) adds that nothing in the definition "may be construed to mean that a digital asset is or is not properly classified as a security, commodity, option, securities futures contract, regulated futures contract, or forward contract for any other purpose".

The protection question is where the practical stakes are highest, and it has two separate halves. Money in a bank is a deposit, and deposit insurance attaches to deposits. Crypto held at a platform is not a deposit, so if the platform fails there is no equivalent federal backstop. The brokerage side is more intricate. FINRA explains that crypto assets which are not securities as defined in the Securities Investor Protection Act are not protected under that Act, and that even some crypto assets that count as securities under other federal securities laws might not be securities under SIPA. In particular, an investment contract that is a security under other federal securities laws is not a security under SIPA unless it is also registered with the SEC under the Securities Act of 1933. The upshot is that a customer can be holding something that a court would call a security and still fall outside the customer protection regime that ordinarily applies when a broker-dealer fails.

The category is also not one thing. FINRA's own taxonomy separates native crypto assets, sometimes called coins, which belong to a specific blockchain and are the ones most often called cryptocurrency, from tokens, which are built on a blockchain and depend on it to operate. Tokens can carry a utility, a governance right or an ownership interest, and multiple blockchains can support them. Stablecoins aim to hold a fixed value against a reference such as the dollar. Non-fungible tokens carry unique identifiers and metadata so that one cannot be swapped for an equivalent. Treating these as variants of a single asset is the error that leads people to reason about an NFT the way they would reason about bitcoin.

Two vocabulary points close the naming question. The IRS uses "convertible virtual currency" for a digital asset that has an equivalent value in real currency or acts as a substitute for one, which is the narrower thing most people mean by cryptocurrency. And FINRA notes that crypto assets are not issued by central banks and, except in a handful of smaller countries, are not designated by governments as legal tender. Calling them currency describes an intention, not a legal status.

What the rest of this topic covers. Because this page is the umbrella, the detail lives on the pages beneath it, grouped by what a reader is actually asking about.

Individual assets. Bitcoin is the first and largest, with its own supply schedule and its own page. Stablecoins are a separate design problem.

The underlying technology. Blockchain is the ledger, and the mechanics of how records are appended and agreed belong there rather than here.

Holding and custody. A crypto wallet is the instrument that holds the keys, and the distinction between a wallet connected to the internet and one that is not is the central security decision an owner makes. Where the asset sits also determines what happens if the platform holding it fails.

Tax. Every disposition is a taxable event and the reporting rules changed recently, which is a large enough subject to have its own page.

Regulated products. A spot bitcoin exchange-traded product is a listed security that holds the asset, and the wrapper carries a different set of protections from direct ownership.

Ownership is recorded on a shared ledger rather than on a company's books. A transaction is broadcast to the network, validated by the network's own consensus process, and appended to the ledger. FINRA describes blockchain as append-only and seeking to be immutable, meaning that once data is added it cannot be deleted and can be modified only by agreement among the peers on the network. Control of an asset rests on control of a cryptographic key, which is why custody is the dominant practical risk rather than a footnote.

Two arrangements follow from that, and they are not equivalent. In custodial holding, a platform holds the keys and the customer holds a claim against the platform. In self-custody, the owner holds the keys directly and there is no intermediary to ask for help. The first introduces the platform's solvency and security as risks; the second makes the owner the last line of defense, with no password reset. FINRA notes that theft of crypto assets is a significant risk, that there are many points where something can go wrong, that many of the entities involved operate internationally without regulatory oversight, and that recovery of stolen crypto assets is rare.

The tax mechanics all follow from the property characterization. Because the asset is property rather than currency, spending it is a disposal, swapping one asset for another is a disposal of the first, and each disposal produces a gain or a loss measured against basis. Holding period determines whether that gain is short-term or long-term on the same one-year test that applies to other capital assets.

What the technology genuinely offers

• Transfer without an intermediary, which works across borders and outside banking hours.
• A public transaction history that is append-only and, by design, hard to alter after the fact.
• Self-custody is possible, so an owner can hold an asset without depending on any institution staying solvent.
• Divisibility and programmability allow arrangements that are awkward to build with traditional instruments.

What a buyer is taking on

• FINRA describes crypto assets as often exceptionally risky and volatile, with a significant risk of losing the entire investment, and less liquid than stocks and bonds.
• No deposit insurance, and customer protection on the brokerage side may not reach assets that are not securities under the specific statute that governs it.
• Regulatory status is unsettled and is determined asset by asset, so the protections attaching to a given holding are not obvious from the outside.
• Custody is unforgiving. A lost key generally means a lost asset, and recovery after theft is rare.
• Every disposal is a taxable event, including swapping one asset for another and paying for something, which produces a record-keeping burden most owners underestimate.