Will Coinbase’s Legal Win Raise Crypto Tax Rates?

When Coinbase’s attorney compared crypto assets to Beanie Babies in a U.S. courtroom, it might have sounded like a lighthearted metaphor. But that single analogy could reshape how the IRS taxes cryptocurrencies — and potentially cost investors, employees, and token recipients billions.

In January 2024, during Coinbase’s defense against the SEC, attorney William Savitt argued that crypto tokens traded on the exchange should be viewed like collectibles rather than securities. 

His remark — “It’s the difference between buying Beanie Babies Inc. and buying Beanie Babies” — captured headlines for its simplicity. Yet, beneath the humor lies a serious implication: if crypto assets are treated as collectibles, they could become subject to a higher 28% long-term capital gains tax rate, instead of the standard 0–20% range.

That distinction could impact nearly every U.S. taxpayer who holds, trades, or receives crypto — including employees and contractors compensated in tokens. Under current law, most crypto assets are taxed as property, meaning profits are eligible for standard long-term capital gains treatment if held for more than a year. But if the IRS or Congress reclassifies crypto as a collectible, millions of holders could face higher taxes, retroactive liabilities, and potential penalties for underpayment.

This issue isn’t purely theoretical. In 2023, the IRS released Notice 2023-27, explicitly seeking public comment on whether Non-Fungible Tokens (NFTs) should be considered collectibles under Section 408(m) of the Internal Revenue Code. That section currently defines collectibles as tangible personal property — items like art, antiques, and coins — but it also gives the IRS authority to expand the list.

For fungible crypto assets like Bitcoin or Ethereum, the IRS would need Congress to modify Section 408(m) to include intangible digital property. While such a change remains unlikely in the near term, it reveals how the U.S. government may seek new ways to regulate and tax the growing crypto economy — especially if courts limit the SEC’s ability to classify tokens as securities.

So, what’s really at stake?

If Coinbase prevails, the decision could redefine how regulators view the crypto ecosystem. The SEC might lose authority over certain assets, but the IRS could respond by tightening its grip — reinterpreting tax rules to ensure revenue neutrality. The result could be a paradox where crypto avoids securities regulation but faces higher tax treatment under the “collectibles” framework.

For companies paying contributors or employees in tokens, this uncertainty underscores the need for robust tax compliance and proactive planning. The classification of crypto doesn’t just affect investors — it directly shapes payroll, compensation, and withholding obligations.

At Toku, we help organizations navigate these evolving regulatory dynamics — from token grant administration to global payroll compliance. As courts and agencies debate how crypto should be defined, we’re focused on helping businesses and their teams remain compliant, confident, and ready for whatever the next ruling brings.

Understanding the Collectibles Capital Gains Debate

To understand why Coinbase’s courtroom argument matters, it’s essential to look at how the U.S. tax code treats collectibles — and why that category exists at all.

The Internal Revenue Code (IRC) distinguishes between different types of property for capital gains purposes. Most investments, such as stocks, bonds, or digital assets (under current IRS guidance), qualify for standard long-term capital gains rates ranging from 0% to 20%, depending on the taxpayer’s income bracket. These rates reward long-term investment and are a cornerstone of U.S. tax policy.

Collectibles, however, are treated differently. Items such as art, antiques, rare coins, and precious metals fall under IRC Section 408(m). These are considered “tangible personal property” held primarily for their rarity or aesthetic value rather than for productive or investment purposes. Because of this, the IRS applies a 28% maximum capital gains tax rate to collectibles — a much higher rate than ordinary long-term investments.

When Coinbase’s legal team likened crypto tokens to Beanie Babies, they unintentionally highlighted a tax paradox. If crypto assets aren’t securities (as Coinbase argues) but also aren’t ordinary property (as the IRS currently defines them), then what are they?

This is where the collectibles framework could become a regulatory fallback. If courts rule that crypto tokens are not securities, the IRS might respond by classifying certain digital assets — or categories of them — as collectibles to maintain revenue consistency.

What Would Change If Crypto Became a “Collectible”

If Congress or the IRS reclassified fungible crypto assets as collectibles, the implications would ripple across the entire digital economy:

1. Higher Tax Rates on Long-Term Gains: Investors holding Bitcoin, Ethereum, or other tokens for more than a year would see their tax rate jump from 0–20% to 28%, a significant increase.
2. Retroactive Tax Risk: If the IRS interprets the change as clarifying existing law, not creating new law, it could argue that prior years’ returns underpaid — exposing holders to penalties and interest.
3. NFTs in the Crosshairs: The IRS already hinted at applying the collectibles rate to NFTs in Notice 2023-27, inviting comment on whether certain NFTs resemble art or antiques in economic function. Extending that logic to fungible crypto isn’t impossible — especially if token issuers frame their assets as digital collectibles.
4. Implications for Token Compensation: Workers receiving tokens as compensation could be doubly affected — first through income tax at vesting, and later through higher capital gains tax upon sale. Employers would need to revisit payroll, valuation, and withholding frameworks to maintain compliance.
5. Uncertainty for Investors and Startups: A reclassification could create a compliance gray zone, forcing companies to re-evaluate reporting structures, investor documentation, and token grant design to align with tax obligations.
   

Why the 28% Rate Exists

The collectibles rate was designed to discourage speculative hoarding of tangible assets that don’t contribute to productive investment — such as art or memorabilia. The rationale was that wealth stored in collectibles doesn’t drive business growth or job creation.

Crypto, however, doesn’t fit that mold. Bitcoin, stablecoins, and governance tokens are used in commerce, infrastructure, and governance — all productive, utility-driven applications. Yet, without updated legislation, crypto’s tangible vs. intangible distinction might not protect it from the same treatment as collectibles.

This is why Toku and other compliance-focused organizations continue to monitor these discussions closely. The outcome won’t just determine how individuals are taxed, but also how companies design token-based compensation globally.

How Coinbase’s Argument Could Reshape Crypto Tax Policy

At first glance, Coinbase’s Beanie Babies analogy might seem like a creative legal strategy to distance crypto from securities law. But the implications stretch far beyond the SEC vs. Coinbase courtroom. The argument doesn’t just challenge the SEC’s jurisdiction — it could unintentionally open the door for the IRS to step in and redefine how crypto is taxed.

From Securities Law to Tax Law: A Shifting Battlefield

If the courts agree with Coinbase that most fungible tokens aren’t securities, the SEC could lose authority over how exchanges and token issuers operate. That would be a win for crypto innovation — fewer registration burdens, simpler compliance structures, and less uncertainty for builders.

However, that victory may come with a hidden trade-off. The IRS, which already taxes crypto as property under Notice 2014-21, might seize the opportunity to revisit its definition in light of a new legal precedent. If tokens aren’t securities, and if Coinbase and others describe them as collectibles, the IRS could interpret that classification literally.

This is where the “collectibles capital gains rate” enters the picture — a rate designed to capture revenue from tangible personal property, but which could be extended (via congressional amendment or new interpretation) to include intangible digital assets.

The result? The SEC might lose jurisdiction, but the IRS could tighten its grip — turning crypto from a regulatory problem into a tax one.

Potential IRS Responses

If Coinbase wins, here are a few realistic ways the IRS might respond:

1. Reinterpret Existing Guidance (Notice 2014-21): The IRS could issue a follow-up notice clarifying that some or all crypto assets meet the characteristics of collectibles. This wouldn’t require new legislation, only interpretive guidance — a faster and more flexible route.
2. Seek Legislative Amendment to Section 408(m): Congress could add “intangible digital assets” to the list of items that may qualify as collectibles. While unlikely in the short term, such an amendment would create a long-term tax distinction between traditional investments and digital property.
3. Focus on NFTs and Hybrid Tokens First: NFTs already resemble digital art and memorabilia, giving the IRS an easier case for reclassification. Once that precedent is established, fungible tokens could follow under expanded definitions.
4. Increase Scrutiny on Token-Based Compensation: If tokens are considered collectibles, employees receiving them could face different withholding requirements and potentially higher tax obligations — forcing employers to update documentation, valuations, and filings.
   

Why This Matters for Token Compensation

Most crypto companies don’t realize that these regulatory shifts directly affect how they pay their teams. If tokens are reclassified as collectibles:

• Fair Market Valuation (FMV) becomes harder to justify, since collectibles require appraisals, not market-based pricing.
• Employee Withholding may become inconsistent across jurisdictions, especially when using stablecoins or cross-border token payments.
• Section 83(b) Elections — commonly used for early token or equity grants — may no longer function the same way for collectible-classified tokens.
• Deferred Compensation Rules (409A) may overlap with new definitions, creating unexpected exposure for startups.

In short, Coinbase’s argument could create a domino effect, shifting crypto’s primary compliance risk from securities law to tax law — an area with far fewer gray zones and far steeper penalties.

A Strategic Perspective

For investors, this shift would change how portfolios are structured and how tax-loss harvesting is applied. For employers, it means revisiting every token grant, vesting schedule, and payroll integration. For policymakers, it’s another balancing act — promoting innovation without compromising tax fairness or enforcement capacity.

This is where Toku plays a critical role. By combining expertise in token compensation, global payroll, and regulatory compliance, Toku helps crypto organizations prepare for whatever the IRS decides next — ensuring that both teams and companies remain compliant, audit-ready, and future-proof.

The Legal Hurdles: Why Reclassifying Crypto as a Collectible Isn’t Easy

Although the IRS could theoretically pursue a new interpretation of crypto taxation, doing so in practice would be legally complex and politically sensitive. The U.S. tax system relies heavily on precise statutory definitions, and the concept of collectibles under IRC Section 408(m) was never designed to include intangible assets like cryptocurrencies or NFTs.

1. The Statutory Barrier: Tangibility Matters

Section 408(m) defines collectibles as tangible personal property — items that can be physically held, displayed, or transferred in their physical form. Examples include art, antiques, metals, coins, and historical objects.

Crypto assets, however, are intangible by nature. They exist as entries on a distributed ledger — not as physical objects. For the IRS to apply the collectibles capital gains rate to digital assets, Congress would need to amend Section 408(m) to expand its scope to intangible property.

That’s a heavy legislative lift. Lawmakers would have to reconcile how a code section designed for tangible assets now applies to digital ones, without unintentionally sweeping in other intangible categories like patents, trademarks, or even digital media.

2. Congressional Reluctance

Historically, Congress moves slowly on tax reform — especially when it involves emerging technology. Digital assets already suffer from a patchwork of definitions across agencies:

• The SEC treats some tokens as securities.
• The CFTC calls Bitcoin and Ether commodities.
• The IRS taxes them as property.
• The FinCEN considers them money equivalents for AML purposes.

Adding a new “collectible” definition would only deepen the confusion. Lawmakers would likely hesitate to create another conflicting classification without comprehensive crypto legislation first.

3. Administrative and Enforcement Challenges

Even if Congress or the IRS wanted to expand the collectibles rule, enforcement would be a nightmare.

• Valuation: Determining “fair market value” for volatile crypto assets is far more complex than appraising art or coins.
• Liquidity: Collectibles are typically illiquid, but crypto trades daily across thousands of markets, making a fixed 28% rate less justifiable.
• Taxpayer fairness: Many taxpayers have been paying capital gains on crypto under Notice 2014-21 for a decade. Retroactively changing that classification could trigger widespread disputes, amended returns, and potential litigation.

For these reasons, it’s more likely the IRS will focus on narrow cases, such as NFTs that closely resemble art or collectibles, rather than attempting a sweeping reclassification of all crypto assets.

4. The NFT Precedent

In Notice 2023-27, the IRS explicitly asked for public feedback on whether NFTs should be treated as collectibles under Section 408(m). The language was careful — it didn’t assert they already are collectibles, but rather sought input on when they should be.

That cautious phrasing reveals the IRS’s own hesitation. They understand that expanding “collectibles” to include digital property could unintentionally open a Pandora’s box of definitional conflicts. Still, if the IRS concludes that some NFTs function like art or memorabilia, that could serve as a stepping stone toward a broader reconsideration of crypto taxation in the future.

5. The Practical Reality

In short: it’s unlikely — though not impossible — that fungible crypto assets will be taxed as collectibles anytime soon. Doing so would require either:

• A legislative amendment to Section 408(m), or
• A reinterpretation that would almost certainly be challenged in court.

For now, it’s relatively safe to assume that crypto investors and token-compensated workers will continue to enjoy the standard 0–20% long-term capital gains rate — provided they hold assets for more than a year and comply with existing tax-reporting obligations.

However, that doesn’t mean companies can relax. The IRS’s willingness to explore collectible treatment shows that regulators are still looking for new ways to assert oversight over digital assets. In other words, compliance expectations are only going up — not down.

This is why it’s critical for crypto employers, DAOs, and token-based organizations to stay ahead of potential changes. Having the right token compensation framework in place today ensures resilience, no matter how the regulatory landscape evolves tomorrow.

At Toku, we partner with organizations globally to design compensation systems that adapt to change — combining tax compliance, legal clarity, and global payroll expertise into one seamless solution.

Implications for Crypto Investors and Employers

While much of the Coinbase case discussion has focused on regulation and classification, the practical impact lies in how these rulings affect two key groups: individual investors and crypto employers. The ripple effects could reshape everything from investment strategies to payroll operations.

1. For Individual Crypto Investors

Higher Potential Tax Burden

If crypto assets were ever reclassified as collectibles, long-term investors could see their tax rates increase by as much as 8 percentage points — from a maximum of 20% to 28%. This might not sound dramatic at first glance, but for large holders or those realizing six-figure gains, the difference can be substantial.

For example: An investor who earned $100,000 in long-term crypto gains currently owes up to $20,000 in federal capital gains tax. Under a collectibles regime, that bill would rise to $28,000, plus potential state taxes.

Retroactive Exposure

A retroactive application of the rule — though unlikely — could cause even greater chaos. The IRS could argue that previous filings underreported tax liabilities if crypto should have been taxed as collectibles all along. That could result in amended returns, penalties, and interest for years of activity.

Even without reclassification, investors should be aware that the IRS has been tightening crypto enforcement, introducing new Form 1099-DA reporting and expanding data-sharing agreements with major exchanges.

Complexity in Tax Planning

If the collectible classification were applied, common strategies like tax-loss harvesting, deferral, or asset gifting would become more complicated. Collectibles have unique holding period rules and cannot be included in certain tax-advantaged accounts (like IRAs).

In short, even if a 28% collectibles rate never becomes law, the debate itself signals that investors should review their crypto tax strategies with qualified professionals — especially as the IRS refines reporting standards and expands enforcement mechanisms.

2. For Crypto Employers and Token-Issuing Organizations

For companies that pay employees or contributors in tokens, the implications go far beyond investment gains — they strike at the heart of payroll and compensation compliance.

Valuation Challenges

Reclassifying tokens as collectibles would complicate how employers determine fair market value (FMV) for compensation purposes. Traditional payroll relies on market-based valuations for tax withholding; collectibles, by contrast, often require formal appraisals. Applying that model to a volatile, high-volume asset class like crypto would be impractical and burdensome.

Payroll and Withholding Requirements

If token payments were taxed as collectible compensation, employers might need to adjust withholding processes, Form W-2 reporting, and cross-border compliance structures. For multinational organizations, this could trigger mismatches between jurisdictions that continue to treat tokens as property versus those adopting collectible-like rules.

Impact on Token Grant Design

Token-based compensation programs — including restricted token units (RTUs), token options, and vesting schedules — would need significant redesign. Employers would have to review:

• Whether their current token plans rely on deferred-compensation exemptions (e.g., Section 409A).
• How collectibles classification might affect 83(b) elections and the timing of income recognition.
• Whether adjustments to plan documents are needed to align with potential tax code changes.

Cross-Border Implications

Global organizations would also face ripple effects. Some countries reference U.S. tax guidance when developing their own crypto regulations. A change in how the U.S. treats crypto capital gains could influence how other jurisdictions define income, reporting, and withholding requirements — especially in Europe and Asia, where regulatory frameworks are still evolving.

3. The Bigger Picture: Strategic Compliance

Regardless of how the Coinbase case plays out, one outcome is already clear: the intersection of tax and crypto compensation is becoming a priority for regulators.

Organizations can no longer afford to treat token compensation as an afterthought. What’s needed is a holistic compliance infrastructure — one that integrates:

• Real-time payroll visibility across fiat and crypto.
• Automated tax withholding for both domestic and international contributors.
• Audit-ready reporting aligned with U.S. and global tax authorities.

That’s precisely the approach Toku takes. Our platform brings together token grant administration, payroll compliance, and expert guidance — ensuring companies stay ahead of evolving tax standards, no matter how the regulatory definitions shift.

By partnering with Toku, crypto organizations can continue rewarding their teams in innovative ways — without risking non-compliance, unexpected liabilities, or operational disruptions.

So, What Comes Next for Crypto Taxation

Whether or not Coinbase wins its case against the SEC, one thing is certain: the outcome will shape how the U.S. government views and taxes crypto for years to come. If courts accept the argument that crypto assets are more like collectibles than securities, the IRS could use that very logic to justify raising long-term capital gains taxes to 28% — or to apply stricter oversight to digital asset compensation.

That potential shift underscores a broader truth: regulatory clarity rarely eliminates complexity — it only moves it. As the SEC’s influence wanes, the IRS and other agencies will continue exploring new ways to define, monitor, and tax crypto activity. For investors, that means preparing for a world where compliance is no longer optional. For employers, it means ensuring every token grant, payroll transaction, and compensation plan is built on a foundation of accuracy and transparency.

At Toku, we believe innovation and compliance can coexist. We partner with the world’s leading Web3 organizations to make token compensation simple, secure, and globally compliant — even as laws evolve. From managing 83(b) elections and Section 409A reviews to streamlining global payroll in fiat, stablecoin, or tokens, our team helps you stay ahead of shifting regulations with confidence.

The Coinbase case may decide how crypto is defined, but how your company responds will determine whether it thrives.

Talk to Toku today to ensure your token compensation and payroll structures are future-proof, compliant, and ready for whatever the next wave of regulation brings.

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