Memecoins explained: what they are, why they're so risky, and what the SEC says

Every crypto cycle produces its own internet-famous tokens: coins named after dogs, frogs, celebrities or jokes, some of which rise thousands of percent in days and then fall just as fast. These are memecoins. They’re the purest form of speculation in crypto, and in 2025 US regulators spelled out exactly what that means for buyers.

What a memecoin is

In its Staff Statement on Meme Coins (27 February 2025), the SEC’s Division of Corporation Finance described memecoins as crypto assets inspired by internet memes, characters, current events or trends, whose promoters try to attract an enthusiastic online community to buy and trade them. According to the statement, they typically have limited or no use or functionality and are bought for entertainment, social interaction and cultural purposes.

Technically, most memecoins are simple tokens created on an existing blockchain, sometimes in minutes, with no product, team commitments or revenue behind them.

What the SEC staff statement says

The key conclusions:

• Not securities: in the staff’s view, transactions in the type of memecoins described do not involve the offer and sale of securities under federal securities laws.
• No federal securities protection: as a result, memecoin buyers and holders are not protected by the federal securities laws: no registration, no required disclosures, no investor protections that come with securities.
• Fraud is still fraud: the statement notes that fraudulent conduct related to memecoins may be subject to enforcement or prosecution by other federal or state agencies under other laws.
• Speculation: it compares memecoins to collectibles whose value is driven primarily by market demand and speculation.

The staff explained its reasoning with the Howey test. Memecoin buyers aren’t making an investment in an enterprise, because their money isn’t pooled and used by promoters to develop the coin or a business. And any profit they hope for comes from speculative trading and market sentiment, like a collectible, not from a team’s managerial work.

It’s a staff statement, not a law or a rule, and it applies to memecoins of the type it describes. The staff said it doesn’t extend to tokens that don’t fit that description, or to products labeled “memecoins” to disguise what would otherwise be a security. A token marketed with promises of profits from a team’s efforts could be treated differently.

The SEC’s 2026 view: digital collectibles

In March 2026, the SEC itself, not just its staff, issued an interpretation sorting crypto assets into five categories. It placed memecoins among digital collectibles, which it said are not themselves securities:

• It described a memecoin as a crypto asset inspired by internet memes, characters, current events or trends, typically acquired for artistic, entertainment, social and cultural purposes, with value driven by supply and demand.
• It noted that holders sometimes create uses for memecoins, such as limiting a chatroom to holders or putting holders on a list for an airdrop.
• It said a token sold as a memecoin with no functionality could later become a digital commodity if it becomes functional within a working crypto system.

That’s why the SEC’s examples are a mix. Its examples of digital commodities include Dogecoin (DOGE) and Shiba Inu (SHIB), alongside bitcoin and ether, while its examples of digital collectibles include WIF, all based on their characteristics at the date of the release. None of these labels says anything about whether a token is a good buy. See is crypto a security?

How memecoins are created and traded

Creating a token on an existing blockchain takes little technical skill, and tools and launch platforms let people do it in minutes. That’s why new memecoins appear constantly, and why the same name can be used by many different tokens.

Most start trading on decentralized exchanges, where anyone can add a token and a pool of liquidity without approval. Some of the most popular are later listed on centralized exchanges, which brings more buyers. The early stage is where prices move most, and where the scams concentrate.

Why memecoins are so risky

1. No underlying value. With little or no use, the price depends entirely on attention and sentiment. The CFTC notes that crypto values are driven purely by supply and demand.
2. Concentrated supply. Creators and early insiders often hold a large share and can sell at any moment.
3. Thin markets. Many trade on decentralized exchanges with small liquidity pools, so selling even modest amounts moves the price sharply. See CEX vs DEX.
4. Rug pulls. Creators remove the liquidity or dump their tokens, and the price collapses.
5. Honeypots. Some tokens are coded so that you can buy but not sell.
6. Copycats. When a memecoin trends, dozens of fakes with the same name appear. Buying the wrong contract is easy.
7. Hype and impersonation. Celebrity or “influencer” promotions can be paid, misleading or entirely fake.

Memecoins and tax

For tax, a memecoin is a digital asset like any other. The usual rules apply:

• US: the IRS treats digital assets as property. Selling a memecoin, or swapping it for another token, is a disposal that can create a capital gain or loss. See US crypto tax.
• UK: exchanging one cryptoasset for another is a disposal for Capital Gains Tax. See UK crypto tax.
• Canada: trading one crypto for another is a disposition. See Canada crypto tax.

Fast trading between memecoins can create many taxable events in a short time, and losses on tokens you sell for less than you paid can generally be set against gains. Keep a record of every trade.

When a memecoin goes to zero

Many memecoins end up worth almost nothing. If you can still sell them, even for a tiny amount, the sale normally creates a capital loss you can report.

In the UK, HMRC also lets you claim a loss on tokens you still own that have become worthless or of “negligible value”:

• A negligible value claim treats the tokens as sold and immediately bought back at the value you state in the claim, which may be £nil.
• Because tokens are pooled, the claim has to cover the whole section 104 pool of that token, not individual tokens.
• The claim states the asset, the amount it’s treated as disposed of for, and the date of the deemed disposal.
• The resulting loss must be reported to HMRC, and you can make the claim at the same time.

See crypto tax-loss harvesting for how losses can reduce your tax bill.

Warning signs

• A token promoted mainly through countdowns, giveaways or “next 100x” posts.
• Anonymous creators holding a large share of the supply.
• Locked or tiny liquidity, or contract code that hasn’t been reviewed.
• Pressure to buy before a listing, a “launch” or an announcement.
• Direct messages offering early access or airdrops. See crypto airdrops explained.

If you buy anyway

1. Treat it as money you can afford to lose entirely.
2. Verify the contract address from the project’s official channels.
3. Use a separate wallet and avoid unlimited token approvals. See fake crypto apps and phishing.
4. Keep records for tax: memecoins are digital assets, and every swap is a taxable disposal.
5. Decide in advance when you’ll sell, because these markets move faster than you can think.