How Crypto Futures are Taxed

Tax Accounting

How Crypto Futures are Taxed
Use this guide to help you reduce any nasty surprises when it comes to the taxation of income from trading crypto futures.
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Futures are one of the oldest ways to trade, hedge risk, and make money. They were originally used to manage volatile prices in commodities like coffee, sugar, wheat, and corn. Today cryptocurrency-based futures are all the rage. 

Trading crypto futures can be a major money-maker, but they can also leave a trader scratching their head wondering just how much their tax bill will be at the end of the year. Use this guide to help you reduce any nasty surprises when it comes to the taxation of crypto futures.

What are crypto futures?

Futures are a type of financial contract that allow traders to bet on the future price of an asset without having to own the asset itself.  Crypto futures are contracts to buy or sell digital assets at a future date.

They are traded for two main reasons:

  1. Businesses - To hedge their risks (futures work like insurance on an asset)
  2. Traders - Speculate on the price of the asset.

How are crypto futures taxed?

In the US,the Internal Revenue Service (“IRS”) has yet to publish any official guidance on the taxation of capital gains or losses from trading crypto-futures contracts. However, we can explore some possible tax implications based on the current regulations.

For tax purposes, crypto futures can be divided into two types: 

  1. Regulated Section 1256 contracts and 
  2. Unregulated future contracts

Regulated Section 1256 contracts

Derivative contracts that satisfy the criteria of section 1256 of the Internal Revenue Code (“IRC”) are considered regulated contracts. The requirements for a futures contract to be considered a regulated contract include:

  1. the amounts required to be deposited or allowed to be withdrawn on the contracts must follow a system of marking to market.
  2. the contracts must be traded on (or made subject to the rules of) a qualified board or exchange.

Not all exchanges that trade cryptocurrency positions will qualify as a qualified board or exchange. Currently, regulated futures contracts are only offered by Bakkt, CME, Erisx and LedgerX.

But why should you be concerned if a future contract is regulated or not?

Well, regulated future contracts have a slightly beneficial tax treatment. They are subject to a hybrid tax rate of 60% as long-term capital gains and 40% as short-term capital gains irrespective of the actual period of holding.

Also, all section 1256 contracts are marked-to-market at the end of the year. In simple terms, the price of the contract at the end of the year is considered to determine the trader’s net position at the end of the year. In case of a capital loss, this can be written off on the trader’s  tax return (or in case of a capital gain, will be taxable in the tax return).

Information about Section 1256 contracts is mentioned in IRS Form 6781.

Note: Section 1256 rules are mandatorily applicable for all regulated derivative contracts irrespective of whether you are a casual investor or trader, unless opting for section 475(f) election which exempts securities trades from wash sale loss adjustments and the capital-loss limitation against other income.

Unregulated crypto futures contracts

Any futures contract not fulfilling the requirements of section 1256 will be treated as an unregulated futures contract. Contracts offered by big exchanges like Binance, Bybit, and Deribit are all considered unregulated derivatives for tax purposes.

Tax treatment varies for casual investors and traders:

Casual Investors

Taxable events for casual investors arise either on closure or settlement of the position. The profit or loss in such a case will be treated similarly to the underlying asset. 

If the contract was held for up to 1 year, it will be considered as short term capital gain and taxed at the ordinary income tax rate

If the contract was held for more than 1 year, it will be considered as long term capital gain and taxed at the lower long term rate capital gains rates of 15%.

Gains or losses will be reported to the IRS in Form 8949 and Schedule D.


Traders may make a Section 475(f) election, which allows traders to treat capital gains and losses as ordinary income and losses. The benefit of this election is that a trader can offset gains with losses in a tax year.

The downside of this election is that all income will be taxable at the ordinary income tax rates. So even if a position was held for more than a year, it will not be subject to a preferential long-term rate. This usually isn’t a problem for traders though as most, if not all, of a trader’s transactions will be short-term.

Additionally, traders are required to mark-to-market their open positions at the end of the year. The gains/losses on such mark-to-market will be included in the tax return.

Traders opting for section 475(f) are required to file Form 4797 and Schedule C with the IRS.

To summarize, here’s how reporting your income from crypto futures per general tax laws compares with reporting per section 475(f):

  1. Without Section 475(f) election:

    If you meet the criteria the IRS has outlined in Topic 429 to be considered as a trader, your crypto futures profit or loss will result in capital gains. This will be required to be reported to the IRS in Form 8949 and Schedule D. In addition, traders can also write off trading-related business expenditures in Schedule C (internet fees, subscription fees, etc).
  2. With Section 475(f) election:

    For traders, it’s almost always best to opt for section 475(f). Assume you as a trader incurred a net loss of $10,000 in a year from trading activities. Without a Section 475(f) election, you will only be able to deduct $3,000 worth of net losses since these are like capital assets.

Now that we have an understanding of possible tax treatments and various options available to minimize the tax impact, let’s look at a comprehensive example to illustrate how trading regulated futures is better than unregulated futures.


Say Jacob purchased 1 bitcoin future for $10,000 on January 1, 2022. He sold it on March 31, 2022, for $20,000. Assume his ordinary Income tax rate is 24% and a long-term tax rate of 15%.

Particulars Regulated crypto futures Unregulated crypto futures
Futures profit ($20,000 - $10,000) $10,000 $10,000
Long term capital gains $6,000 ($10,000 * 60%) -
Short term capital gains $4,000 ($10,000 * 40%) $10,000
Tax Payable $1,860 ($6,000 * 15%)+($4,000 * 24%) $2,400 ($10,000 * 24%)

Jacob’s tax savings by trading a regulated crypto derivative is roughly 22.5% when compared to similar gains from unregulated crypto derivatives.

Bitwave makes it easy to prepare your crypto futures taxes

Bitwave streamlines the process of preparing crypto futures taxes by providing an easy-to-use platform for tracking and reporting on your futures trades. With Bitwave, you can accurately calculate your capital gains or losses on both regulated and unregulated crypto futures contracts, and generate tax documents that meet the requirements of the IRS. This allows you to focus on your trading activities and not worry about the complexity of preparing your crypto futures taxes.

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Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as tax, accounting, or financial advice. The content is not intended to address the specific needs of any individual or organization, and readers are encouraged to consult with a qualified tax, accounting, or financial professional before making any decisions based on the information provided. The author and the publisher of this blog post disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use or application of any of the contents herein.