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Day Traders Can Use Regulated Crypto Futures To Save Big On Taxes

Shehan Chandrasekera, CPA

Jun 25, 2020 • 4 MIN READ

This post was originally posted on Forbes by Shehan Chandrasekera on June 19th, 2020

Regulated cryptocurrency futures bypass the default short-term, long-term capital gain tax rules applicable to cryptocurrencies. It allows you to treat 60 cents of each dollar of profit you make as long-term gains, irrespective of the holding period of the asset. For the savvy day trader, this can yield up to 24% of tax savings.

What Is A Cryptocurrency Futures Contract?

A futures contract is an agreement between two parties to buy or sell an asset on a given future date for a specified price agreed upon today. When you buy a futures contract, you do not own the underlying asset; you simply own the legal contract which gives you the right to buy or sell the underlying asset at a future date on a set price.

In the crypto world, many futures contracts are cash settled. This means that there is no physical exchange of bitcoin or other cryptocurrency between two parties at the contract expiration. Instead, on settlement, you get the price difference between the position entry and exit prices. The price difference is reflected on a line item labeled as “PnL” or “Profit/Loss” on most exchange interfaces. When it comes to taxation this is the amount you need to pay attention to.

PnL shown on Kraken exchange dashboard

PnL shown on Kraken exchange dashboard


For example, on June 18, 2020, let’s say Jennet bought a futures contract which granted her the right to buy one bitcoin (BTC) at $10,000 on June 30, 2020. Then on June 30th, the price of 1 BTC is $20,000. In this case, Jennet’s cash settled futures profit would be $10,000 ($20,000 – $10,000).

Note: if the futures was to be physically settled instead, the counterparty to Jennet’s contract would have to send her 1 BTC on June 30th. Then Jennet could do whatever she wants with the bitcoin, including  immediately selling it at the current market price and profit $10,000. Physically settled crypto futures are very rare at the moment.

Cryptocurrency exchanges facilitate the whole process described above and charge a fee for creating a meeting place for buyers and sellers.

Unregulated Crypto Futures Contracts

The majority of the cryptocurrency futures products offered in the market right now are considered to be unregulated because they are not governed by a regulator like Commodities and Futures Trading Commission (CFTC). Unregulated contracts do not get any favorable tax treatment and work similar to buying/selling regular cryptocurrencies. If you make a profit by selling an unregulated crypto futures contract after holding it for 12 months or less, it is taxed as short-term capital gains. If you make a profit after holding a position for more than 12 months, it results in a long-term capital gain (lower tax rate).

Regulated Crypto Futures Contracts

Regulated Futures Contracts have a more favorable tax treatment under IRS Code §1256. When you trade regulated contracts, 60% of the profits are taxed as long-term capital gains and 40% of the gains are taxed as short-term capital gains, irrespective of how long you keep the position open. Essentially, trading regulated contracts allows you to convert 60% of your profits into long-term gains and get taxed at a much lower rate than short-term gains. Note that this is highly beneficial for day traders.

Continuing with the example above, Jennet could save 24% more in taxes by trading regulated contracts compared to unregulated contracts (assuming Jennet’s ordinary income tax rate and long-term capital gain tax rates are 25% and 15%, respectively):

Tax savings between regulated crypto futures Vs. unregulated crypto futures

Tax savings between regulated crypto futures Vs. unregulated crypto futures


Keep in mind that if you are trading cryptocurrency futures and generating tax savings, you will want to ensure that you are tracking these transactions in a reputable cryptocurrency tax software that keeps track of futures trades.

Feedback or questions? Reach out to us on Twitter @CoinTracker

Disclaimer: this post is informational only and is not intended as tax or investment advice. For tax or investment advice, please consult a professional.


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