USD stablecoins not legal tender - yet?

Written by Kennedy Kelly, Editor-in-Chief, UC Law Science and Technology Journal

Stablecoins have emerged as a dominant force in the digital asset economy and increasingly as an alternative method to make payments. Digital assets such as USD Coin (USDC), Tether (USDT) and PayPal USD (PYUSD) now function as a medium of exchange in decentralised finance, centralised trading and international settlements. These assets maintain their value by pegging to the US dollar, typically through 1:1 reserves held in fiat or Treasury instruments and offer the speed and transparency of blockchain networks with the perceived stability of fiat currency. Despite this, stablecoins remain effectively excluded from the formal public finance system. Nowhere is this more evident than in the realm of taxation. Whilst private entities, merchants and cross-border users increasingly rely on stablecoins for efficient payment, the US government does not accept them for tax obligations. The divide between their technological utility and legal acceptance reflects deeper issues of classification, regulatory treatment and statutory rigidity. This article analyses the current legal framework that prevents stablecoins from being used to satisfy tax obligations. It also considers how the recently enacted GENIUS Act resolves foundational barriers to stablecoin adoption, and how it may signal the start of their integration into civic finance.

Legal tender in the United States is defined narrowly. Under 31 U.S.C. § 5103, only US coins and currency, including Federal Reserve notes and notes issued by national banks, qualify. This provision has long served as the foundation for defining acceptable payment instruments in both public and private contexts. Stablecoins, despite their dollar-denominated value, are not issued by the government and are not backed by the full faith and credit of the United States. Consequently, they fall outside the scope of legal tender. Their treatment as private property rather than currency further limits their legal applicability to taxes and other public debts. Furthermore, the Internal Revenue Service classifies all virtual currencies, including stablecoins, as property for tax purposes - this classification was established in IRS Notice 2014-21 and reiterated in later guidance. Under this regime, any use of a stablecoin in a transaction is considered a disposition of property. If the stablecoin’s value at the time of the transaction differs from its acquisition cost, the user incurs a capital gain or loss. This means that using USDC to pay a $5,000 tax bill could require the taxpayer to calculate and report capital gains, even if the token has not deviated from its one-dollar peg. This treatment creates a fundamental disconnect between how stablecoins are used in practice and how they are treated under federal tax law. It imposes compliance burdens and reporting obligations that make stablecoins functionally impractical for tax remittance, even if their price remains stable.

At the federal level, the IRS and Department of the Treasury have not authorised the use of stablecoins for direct tax payments. Current IRS payment systems accept only dollar-denominated payments, including bank transfers, credit cards and select digital platforms such as PayPal - all such services ultimately settle in US dollars. No system exists to accept or process blockchain-based assets directly and any attempt to use a stablecoin to pay taxes would require conversion into dollars through an exchange, an act which itself may be taxable under current rules. Additional complexity arises from other federal oversight bodies. The Financial Crimes Enforcement Network applies anti-money laundering (AML) and know-your-customer (KYC) regulations to stablecoin issuers and exchanges. Compliance with these rules can create friction for adoption by public agencies, many of which lack the infrastructure or personnel to monitor or enforce such standards. Without explicit authorisation, stablecoins remain excluded from IRS payment portals and federal tax workflows. State and local governments generally follow federal definitions for legal tender and tax remittance with most accepting tax payments through traditional channels such as cheques, bank transfers and credit cards. These methods are easy to reconcile with existing accounting and reporting systems. Very few jurisdictions have explored accepting blockchain-based assets. The most notable pilot occurred in Ohio, which briefly allowed businesses to pay certain state taxes in Bitcoin through a third-party processor. That program was discontinued within a year, citing low participation and concerns about its legality. More recently, Colorado began accepting cryptocurrency for certain payments, but only through a system where funds are immediately converted into dollars using PayPal’s backend. Whilst symbolic, this approach demonstrates a potential model for stablecoin tax payments if properly structured.

The principal barrier to integrating stablecoins into tax systems is not volatility or technology but classification. As long as stablecoins are treated as property, their use in payment will trigger reportable tax events. This reality renders them cumbersome for mainstream remittance. Each transaction requires taxpayers to determine the acquisition cost of the token, compare it to the market value at the time of payment, and report any resulting gain or loss. Beyond taxation, there are administrative and infrastructural concerns. Governments would need to establish custody solutions for receiving and holding stablecoins. They would need to integrate blockchain explorers into their compliance systems and create automated tools for reconciliation and reporting. They would also need to assess which stablecoins are sufficiently backed, liquid and transparent to be considered viable for acceptance - these concerns are especially acute for smaller jurisdictions. Local governments often lack the budget or staff to develop or license these tools and even at the federal level, the cost and complexity of overhauling legacy tax infrastructure may be difficult to justify in the absence of statutory mandates.

Nevertheless, there are compelling reasons to consider stablecoin adoption. Digital assets can offer faster settlement, reduced transaction fees and improved transparency and smart contract systems can automate compliance tasks and reduce administrative overhead. For taxpayers, stablecoins offer programmable payment options, reduced banking fees and expanded access. In July 2025, Congress enacted the Guiding and Establishing National Innovation for US Stablecoins Act, known as the GENIUS Act - this legislation is the first comprehensive framework for stablecoin regulation in the United States. It creates a dual licensing regime in which issuers must either obtain a federal license or operate under state regulatory authority. The law mandates that all stablecoins be backed one-to-one by liquid US dollar reserves or Treasury securities. It requires monthly public disclosures of reserves, with additional audit obligations for large issuers. Stablecoin issuers must comply with the Bank Secrecy Act and implement anti-money laundering and know-your-customer procedures. The law also prohibits issuers from paying interest on stablecoins and bans any implication that the tokens are federally guaranteed. The GENIUS Act does not designate stablecoins as legal tender, nor does it directly authorise their use for tax payments. However, by establishing clear standards for reserve backing, disclosure and compliance, it removes many of the legal uncertainties that have prevented public agencies from engaging with stablecoin infrastructure.

With the GENIUS Act in place, agencies such as the IRS could issue guidance or create pilot programs to explore the use of compliant stablecoins in limited tax contexts. States could follow suit, integrating GENIUS-compliant stablecoins into their payment portals. These programs would likely involve intermediaries who accept stablecoin payments, convert them into US dollars and remit those funds to tax authorities. Over time, such systems could evolve into direct acceptance, especially if the IRS updates its classification of stablecoins. Internationally, governments have begun experimenting with blockchain-based currencies and exploring their integration into civic systems but while most have focused on central bank digital currencies (CBDCs), a few countries have incorporated privately issued digital assets into state functions. El Salvador stands as the most prominent example. In 2021, it became the first country to adopt Bitcoin as legal tender alongside the US dollar - this radical legal shift meant that taxes, goods and services could be paid in Bitcoin by right. To facilitate adoption, the government launched a state-backed wallet, “Chivo,” and installed a national network of Bitcoin ATMs. Whilst Bitcoin’s volatility has complicated implementation and generated criticism, El Salvador’s move reframed the global conversation. It demonstrated that a sovereign government could legally mandate the use of a digital asset, however volatile, as a civic payment instrument. Though stablecoins differ in structure and function, El Salvador’s model offers a legal template for how non-government-issued digital assets might be statutorily accepted in tax systems. Similarly, the Republic of Palau launched a US dollar–backed stablecoin in partnership with Ripple, specifically designed for public and merchant transactions and Argentina’s San Luis Province issued a blockchain-based digital asset for paying local utility services and government fees. Japan’s Payment Services Act of 2023 clarified legal categories for stablecoins, whilst Singapore’s Project Orchid is testing programmable digital money in the context of public payments. These examples certainly suggest a growing international recognition that digital assets, whether volatile or stable, are not inherently incompatible with civic functions. Rather, their acceptance depends on legal classification, custodial frameworks and political will.

As of mid-2025, stablecoins remain outside the formal definition of legal tender and are not accepted for tax payments at any level of government in the United States. Their classification as property and the absence of enabling infrastructure has made them legally and practically unsuitable for public remittance - yet the landscape is changing. The passage of the GENIUS Act provides the regulatory clarity that agencies and governments need to begin experimenting with stablecoin-based payment systems. Although significant hurdles remain, including the need for IRS guidance and technical integration, the groundwork has been laid for a new era in public finance. Stablecoins are no longer fringe assets. They are emerging as core infrastructure in the global economy. Surely the question is no longer whether they can be used for taxes, but when.