What Is a Stablecoin?

• Stablecoins are a kind of cryptocurrency designed to keep their value steady. They are often linked to things like regular money, commodities, or even other cryptocurrencies.

• Unlike other coins that can change in value quickly, stablecoins are meant to keep their price steady. This makes them helpful for daily payments or for holding money when the market is unpredictable.

• Stablecoins use different methods to stay steady, such as being backed by assets or using algorithms to control supply. The main aim is to make prices less jumpy while still letting people use cryptocurrency.

Stablecoins link their value to a more stable asset or a basket of assets. When pegged to fiat currency, such as the US dollar, the issuer says it holds reserves in that currency or in cash equivalents to back each token, and eligible holders can redeem tokens with the issuer for fiat. Redemption eligibility, minimums, and fees vary by issuer, and most holders instead sell on an exchange. A stablecoin's market price can still drift from its peg if confidence in the issuer or its reserves falls.

Some stablecoins are also algorithmically controlled, with smart contracts automatically adjusting supply based on demand to keep their value stable. Others rely on a combination of crypto assets as collateral, providing a decentralized approach to value stability.

Stablecoins play a crucial role in the crypto economy by bridging the gap between traditional financial assets and digital currency. They enable users to transfer value without the delays and fees associated with fiat, making them ideal for remittances, cross-border transactions, and liquidity in decentralized finance (DeFi) platforms.

Stablecoins also provide investors with a lower-volatility place to hold funds during crypto market swings without leaving the crypto ecosystem, simplifying portfolio management. They are not risk-free: a stablecoin can lose its peg, as UST did in 2022.

There are several types of stablecoins, each with its own mechanism for maintaining a stable value. Here's an overview of the main categories:

• Fiat-collateralized stablecoins

• Crypto-collateralized stablecoins

• Algorithmic stablecoins

Each type carries different risks. The tax treatment is the same for all of them: selling, swapping, or spending any stablecoin is a taxable disposal of the asset you give up, and stablecoins you receive as interest or rewards are income at their fair market value when you receive them.

Fiat-collateralized stablecoins

Fiat-collateralized stablecoins are backed by a reserve of traditional currencies, such as the US dollar or the euro. The issuer typically states that it holds these reserves at a 1:1 ratio and publishes attestations or reserve reports, though redemption terms vary by issuer.

Fiat-collateralized stablecoins generally have lower price volatility than other types, but they depend on the issuer's reserve management, banking partners, and custody. Examples include USDT and USDC.

Crypto-collateralized stablecoins

Crypto-collateralized stablecoins are backed by other cryptocurrencies, providing a decentralized backing mechanism. To address price volatility, they are often over-collateralized, meaning more cryptocurrency is held in reserve than the stablecoins issued.

This approach introduces risk from the collateral's volatility and offers a transparent, decentralized alternative. DAI is a well-known example. It launched backed by Ethereum and now accepts multiple collateral types, including other crypto assets and tokenized real-world assets. MakerDAO, the protocol behind DAI, rebranded as Sky in 2024 and also issues a newer stablecoin, USDS.

Algorithmic stablecoins do not rely on collateral; instead, they use smart contracts to control supply and demand. When demand rises, new tokens are minted to keep the price stable. Tokens are burned to reduce supply as the price falls.

This approach makes algorithmic stablecoins highly flexible and more volatile, as they rely entirely on market dynamics and algorithmic control. UST was a prominent example until it experienced significant instability.

Stablecoin regulations are evolving, with global governments paying closer attention to their use and stability. In the US, regulators are working to establish frameworks around stablecoin issuance and reserves, aiming to protect consumers and reduce systemic risk. These regulations may impact how stablecoins are backed, issued, and used, shaping their future landscape. Staying informed on regulatory developments is key for both issuers and users.

The GENIUS Act and stablecoin oversight

The GENIUS Act, signed by President Trump on July 18, 2025, is the first federal statute focused on payment stablecoins. Once it takes effect, only permitted payment stablecoin issuers may issue payment stablecoins to US users. These include subsidiaries of insured banks, nonbank issuers approved by the Office of the Comptroller of the Currency (OCC), and state-qualified issuers operating under a state regime certified as substantially similar to the federal one.

Permitted issuers must hold reserves of at least 1:1 in cash, bank deposits, and Treasury bills with 93 days or less to maturity, among other approved assets. They must publish monthly reserve reports and have those reports examined monthly by a registered public accounting firm. The act also bars issuers from paying interest or yield to holders.

The law takes effect on the earlier of January 18, 2027, or 120 days after regulators issue final rules. Regulators missed the July 2026 deadline for those rules and are still finalizing them, so January 18, 2027, is the date most practitioners use.

The act does not change how stablecoins are taxed. Stablecoins are still property, so selling, swapping, or spending them is a capital transaction reported on Form 8949 and Schedule D and subject to capital gains taxes. Interest or rewards paid in stablecoins are ordinary income at fair market value when you receive them. The GENIUS Act is a regulatory law and does not create any tax exemption.

Stablecoins can carry risks based on the type and mechanism used to maintain value. Fiat-collateralized stablecoins have historically held their pegs more consistently than algorithmic designs, but they still carry issuer, reserve, custody, and depeg risk. In March 2023, USDC briefly fell below $0.90 after Circle disclosed that part of its reserves was held at Silicon Valley Bank.

However, algorithmic and crypto-collateralized stablecoins may face stability issues, especially during high volatility or reduced market confidence.

Assessing the type and backing of each stablecoin can help users understand and manage these risks effectively.

The IRS treats stablecoins as property, the same as other digital assets (IRS Notice 2014-21). A stable price doesn't make a stablecoin tax-free. This is how common stablecoin activity is taxed:

• Buying stablecoins with USD: Not taxable. Your cost basis is what you paid, including fees.

• Selling stablecoins for USD: Taxable. Your gain or loss is the sale proceeds minus your cost basis. Near $1, the amount is often small, but the sale still goes on Form 8949 and Schedule D.

• Swapping crypto for stablecoins: Taxable. Trading BTC for USDC is a disposal of the BTC, and you realize a gain or loss on it.

• Swapping one stablecoin for another: Taxable. Trading USDC for USDT is a disposal of the USDC, even if the gain or loss is a few cents.

• Spending stablecoins: Taxable. Paying for goods or services with stablecoins is treated the same as selling them.

• Interest, lending, and rewards: Ordinary income at fair market value when the tokens come under your control. Report it on Schedule 1 (line 8v), or on Schedule C if the activity is a business, which also triggers self-employment tax. This income does not go on Form 8949. If you later sell those tokens, your cost basis is the amount you reported as income.

• Transferring between your own wallets: Not taxable. Keep records so your cost basis follows the tokens.

• Depegging: A stablecoin that loses its peg doesn't create a deductible loss until you sell, swap, or spend it.

US brokers began reporting digital asset sales on Form 1099-DA for transactions in 2025. Brokers can report qualifying stablecoin sales in aggregate and don't have to report them at all if your total qualifying stablecoin sales for the year are $10,000 or less. Self-custody wallets don't issue a 1099-DA. Whether or not you get a form, you are responsible for reporting every taxable stablecoin transaction.

For detailed guidance, learn how are stablecoins taxed and how to report cryptocurrency on taxes.