Tax Consequences of Cryptocurrency Derivatives

The U.S. Securities and Exchange Commission’s (SEC) approval of Bitcoin and other exchange-traded funds (ETFs) for listing and trading have sparked both an inflow of institutional capital into digital assets and a proliferation of regulated cryptocurrency derivatives. While trading interest has grown, taxpayers should be aware of some of the specific tax consequences of trading in these instruments.

Some of these cryptocurrency derivative instruments are defined as “Section 1256 contracts,” a term that primarily covers regulated futures contracts (RFCs). These are contracts traded on a qualified board or exchange (QBE) and in which the amount required to be deposited or allowed to be withdrawn must follow a system of marking to market. Under IRC Section 1256, these contracts are marked to market annually, and any resulting capital gain or loss is treated as 40% short term and 60% long term, regardless of the holding period.

Section 1256 defines a QBE as either a national securities exchange registered with the SEC or a domestic board of trade that the Commodity Futures Trading Commission (CFTC) has designated as a “contract market.” The SEC and CFTC both publish lists of national securities exchanges and designated contract markets, respectively, and the Treasury has also issued several revenue rulings defining certain foreign exchanges as QBEs.

The number of regulated exchanges listing Bitcoin and ether futures has grown since 2017, when the CBOE and CME, two of the largest futures exchanges in the world, first listed Bitcoin futures contracts.  The CME listed ether futures in 2021, and several other regulated exchanges have followed suit in listing Bitcoin and ether futures. In 2024, Coinbase Derivatives became the first exchange to list regulated futures on several other digital assets, including Litecoin and Avalanche.

The QBEs that offer Bitcoin and ether futures may also offer “put” and “call” options on these futures.  Such options contracts are also taxed as Section 1256 contracts because they are “non-equity options,” which Section 1256(g)(3) defines as options contracts that are traded on a QBE and are not equity options.

If you have any questions about how trading digital asset derivatives may affect you from a tax perspective, get in touch with Weaver’s Blockchain and Digital Assets team.

Authored by David Hensley

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