Crypto Perpetual Futures Taxes: Gains, Funding Rates, and How to Report Them

Last Updated on May 26, 2026 by Patrick Camuso, CPA

Quick answer (read this first):

Is the tax treatment of crypto perps settled? No. The IRS has not issued guidance specifically addressing crypto perpetual futures taxes. Tax characterization requires applying existing frameworks to a novel instrument, and reasonable practitioners have reached different conclusions.

Why it matters: Whether a perp is treated as a Section 1256 contract, a notional principal contract, or a capital asset changes your tax rate, whether gains are short-term or long-term, whether year-end mark-to-market applies, and how losses can be used.

What a Crypto Perpetual Future Is

A perpetual future, commonly called a perp, is a leveraged derivative that tracks the spot price of a cryptocurrency. Unlike a traditional futures contract, it has no expiration date.

Two things happen economically when a trader holds a perp position. The position gains or loses value as the underlying asset moves. At regular intervals, a funding rate payment is exchanged between long and short position holders. This funding rate is the mechanism that keeps the perp price anchored to the actual spot price of the underlying asset. When the perp price trades above spot, long holders pay shorts. When it trades below spot, shorts pay longs. Settlement frequency varies by venue. Most centralized offshore venues including Binance, Bybit, and OKX settle every 8 hours, hyperliquid settles every hour and coinbase Derivatives settles twice daily.

The funding rate is the structural feature that separates a perpetual from a traditional futures contract. A traditional futures contract converges to spot at expiration. A perpetual has no expiration, and the funding payment enforces that convergence instead. For this reason, the academic literature, the CFTC, and the trading industry itself consistently call these instruments “perpetual swaps.” That description carries tax significance, as discussed below.

Most perps are linear, meaning margin and settlement are in USD, USDT, or USDC. A smaller category, called inverse or coin-margined contracts, are margined and settled in the underlying crypto itself. Every funding payment on an inverse contract involves using or receiving actual crypto, which creates additional taxable events at each settlement and at position close. The accounting complexity is materially higher, and the two structures require separate treatment.

Offshore perpetuals trade on non-US venues including Binance, Bybit, OKX, Bitget, KuCoin, Deribit, and decentralized venues including Hyperliquid, dYdX, and GMX. US perpetual-style contracts trade on CFTC-regulated exchanges including Coinbase Derivatives, Kraken Pro, and Bitnomial. These US venues structure their contracts with a nominal five-year expiration. A new contract is listed approximately one month before the current contract expires, providing continuous availability of the instrument. The five-year structure was designed to navigate CFTC regulatory requirements. The economic substance is still a perpetual swap.

Why the Tax Treatment Is Unsettled

The core question is how a crypto perpetual is characterized for tax purposes, and that question has not been answered by the IRS.

Coinbase Derivatives issues Form 1099-B for perpetual futures activity, and practitioner commentary and broker reporting commonly treat CFTC-regulated perpetual-style contracts as Section 1256 contracts, applying the same 60/40 framework that applies to CME Bitcoin and Ether futures, where 60 percent of gains are treated as long-term and 40 percent as short-term regardless of holding period, with year-end mark-to-market on open positions. Broker operational classification of exchange-listed products as Section 1256 for reporting purposes does not by itself determine substantive tax treatment.

Section 1256(g)(1) defines a regulated futures contract as one with respect to which the amount required to be deposited and the amount that may be withdrawn depends on a system of marking to market, and which is traded on or subject to the rules of a qualified board or exchange. Coinbase Derivatives, Kraken Pro, and Bitnomial are CFTC-designated contract markets and therefore qualified boards or exchanges for Section 1256 purposes. US perpetual-style contracts satisfy both elements of that definition on their face, and practitioner commentary commonly treats Section 1256 treatment as available on that basis.

The more analytically significant question is whether Section 1256 treatment is then removed by a separate provision. IRC §1256(b)(2)(B) categorically excludes commodity swaps and similar agreements from Section 1256, regardless of whether a contract otherwise qualifies as a regulated futures contract under §1256(g)(1). That exclusion operates as an independent gating provision. A contract that otherwise satisfies §1256(g)(1) is still excluded from Section 1256 if it falls within §1256(b)(2)(B). Whether a crypto perpetual constitutes a commodity swap under that provision, given the funding rate mechanism, is the question the existing analysis does not reach.

A crypto perpetual involves periodic cash payments between counterparties, calculated by reference to the spread between the contract’s mark price and an external spot price index, on a notional amount equal to the position size. That structure aligns with the commodity swap concept Congress excluded from Section 1256 under §1256(b)(2)(B) and with the notional principal contract framework under Treasury regulations, and the swap characterization would control over the regulated futures contract characterization.

A related question is whether a contract labeled and listed as a futures contract can qualify as a notional principal contract at all, given that Treasury regulations exclude certain futures contracts from that treatment. That reading creates a circularity since a contract excluded from Section 1256 by the commodity swap provision should not then re-enter the analysis through the same regulatory provision that cross-references Section 1256’s scope. The substance-over-form analysis also supports this conclusion. The funding rate stream makes these instruments swaps in economic substance regardless of the regulatory label under which they were listed.

For offshore perpetuals on Binance, Bybit, and similar venues, and for all non-custodial DeFi perpetuals on platforms including Hyperliquid, dYdX, and GMX, Section 1256 is unavailable on a separate and simpler basis. No offshore venue and no decentralized protocol has been recognized as a qualified board or exchange for Section 1256 purposes. The Section 1256 analysis ends there for those positions, though the underlying characterization question between notional principal contract treatment and capital asset treatment still applies and is discussed in the frameworks section below. The §1256(b)(2)(B) commodity swap question becomes relevant primarily for traders on the US-regulated contracts listed on Coinbase Derivatives, Kraken Pro, and Bitnomial.

For non-custodial DeFi perp traders, the characterization question still matters. The choice between notional principal contract treatment and capital asset treatment determines whether gains are ordinary or capital and whether losses are subject to the capital loss limitation. But no third-party reporting is issued for DeFi perp activity. There is no Form 1099-B, no Form 1099-DA, and no FCM. The self-reporting obligation rests entirely on the trader’s own records, and on-chain transaction data is the primary evidentiary source. Some DeFi venues also involve token conversions to open positions or to post margin. Exchanging one cryptocurrency for another is generally a taxable disposition under existing IRS guidance, which means these conversions create separate realization events distinct from the perp position itself. This adds a layer of complexity not present in custodial trading.

The Three Characterization Frameworks

Notional Principal Contract Treatment

The analytical basis for treating crypto perpetuals as notional principal contracts has two parts. The §1256(b)(2)(B) commodity swap exclusion takes the contract outside Section 1256, as discussed above. The contract then qualifies independently under the notional principal contract framework, which applies to financial instruments providing for periodic payments calculated by reference to a specified index on a notional principal amount. A crypto perpetual satisfies each element of that definition. The funding rate is the periodic payment, calculated by reference to a specified index. The notional principal amount is the dollar value of the position, calculated as mark price multiplied by position size. The specified consideration is the bilateral commitment to make funding payments based on the index spread, secured by posted margin. Under this framework, gains and losses on closing a position are ordinary income or loss rather than capital gains. Open positions at December 31 are not marked to market unless a separate §475(f)(2) commodities trader election has been made. Funding payments are ordinary income or expense recognized as accrued under Reg. §1.446-3(e).

A counterargument worth noting is that Treasury regulations exclude certain futures contracts from notional principal contract treatment. The argument is that a perpetual labeled and listed as a futures contract on a CFTC-designated exchange might fall within that exclusion. That reading creates a circularity, since a contract excluded from Section 1256 by the commodity swap provision should not then re-enter through the futures contract exclusion in the same regulatory framework. The substance-over-form analysis reinforces this since the funding rate stream is the economic substance of the instrument, and that substance is a swap regardless of the regulatory label.

Section 1256 Treatment

Practitioner commentary and broker reporting commonly treat US-regulated perpetual-style contracts as Section 1256 contracts, applying the 60/40 capital gains split available for CME Bitcoin and Ether futures. Offshore perpetuals do not qualify on their face, as no offshore venue is a recognized qualified board or exchange. For US-regulated contracts, the qualified board test is satisfied, but the §1256(b)(2)(B) commodity swap exclusion cuts against this characterization for the reasons discussed in the previous section. The commodity swap exclusion has not been engaged with in the existing practitioner literature on this question. Practitioners taking the Section 1256 position should evaluate whether their analysis addresses it.

Capital Asset Treatment

A third position treats perps as capital assets, with gains and losses on close recognized as short-term or long-term capital gain or loss depending on the holding period. Under this approach, funding payments may be treated as ordinary income or as an adjustment to the contract’s basis, with practitioners applying different approaches. This position is less consistent with the swap-leg structure of the funding rate than the notional principal contract framework, but some practitioners apply it, particularly for clients holding appreciated positions for longer terms.

The characterization framework applied determines the tax rate, the loss deductibility rules, whether year-end mark-to-market applies, and the reporting form used. Switching characterization frameworks between tax years raises accounting method consistency questions under §446 and creates audit exposure on prior years still open under the statute of limitations. The characterization choice carries forward in the same way cost basis errors compound across subsequent years if not addressed at the time of filing.

Funding Rate Treatment

The funding rate is the periodic payment exchanged between long and short position holders to keep the perpetual price anchored to spot. It is the instrument’s core economic mechanism, not a secondary feature. For tax purposes, funding treatment is largely consistent across characterization frameworks.

Funding received is ordinary income at each settlement, regardless of which characterization framework applies to the position. The payment is not capital gain and does not defer until the position closes. Under the notional principal contract framework, Reg. §1.446-3(e) requires ratable daily recognition of periodic payments. For an 8-hour settlement cycle, that collapses to recognition at settlement for practical purposes.

Funding paid is ordinary expense. Active traders in a trade or business can deduct funding paid as an ordinary and necessary business expense under §162. Investors not in a trade or business face a more constrained analysis. Under one approach, funding expense is netted against funding income within the contract under the NPC framework. Under a more conservative approach, net funding expense is an investment expense currently suspended under §67(g) through tax years beginning before 2026. The §212 deduction framework is restored at the 2026 sunset unless extended. Investors with material funding costs should evaluate the netting approach and consider Form 8275 disclosure. Traders with significant funding costs should evaluate entity structure before year-end.

On netting, the intra-contract netting of funding received and paid is structural under Reg. §1.446-3(e). Whether net funding from multiple positions can be aggregated depends on trader status. Active traders on Schedule C can aggregate across positions. Investors not in a trade or business track each position separately. Gross amounts should be retained for substantiation either way.

A trader with a single position open for a full year accumulates over 1,000 funding settlement events. Offshore exchanges do not issue US tax reporting. Some provide transaction history compatible with crypto tax software, but the responsibility for accurate categorization, including identifying funding payments separately from open and close events, rests on the trader. That history must be extracted before it becomes unavailable due to account closure, exchange failure, or data retention limits. Traders who do not pull funding history regularly face reconstruction problems at year-end that are significantly harder to solve than they are to prevent.

On coin-margined contracts, each funding settlement involves actual cryptocurrency changing hands. A received BTC funding payment is ordinary income at the fair market value of the BTC at settlement, with a new tax lot established at that value. A paid BTC funding payment is an ordinary expense and a disposal of the BTC used to settle, which may itself trigger a capital gain or loss on that lot, or ordinary gain or loss if a §475(f)(2) election is in effect. The accounting infrastructure required for inverse perps is substantially more complex than for linear contracts, and the two structures should be treated as separate problems from the start.

The Section 475 Trader Election

Active perp traders who qualify as traders in commodities may be eligible to elect mark-to-market accounting under Section 475(f)(2). Under that election, all positions are treated as sold at fair market value on December 31 each year, with gains and losses treated as ordinary income or loss. The election eliminates the capital loss limitation and allows trading losses to offset ordinary income without restriction.

Qualifying for the §475(f)(2) election requires two showings. First, the taxpayer must be in a trade or business of trading under the longstanding standard, which looks to substantial, regular, and continuous trading activity with a primary profit motive from short-term price movements. Second, the trade or business must be in commodities as defined under §475(e)(2).

The IRS has not issued specific guidance on whether crypto perpetuals qualify as commodities under §475(e)(2). Under the notional principal contract analysis described in this article, a crypto perpetual is a notional principal contract with respect to an actively traded commodity, which falls within §475(e)(2)(B). The commodity status of crypto under §1092(d)(1) is supported by the NYSBA Tax Section’s analysis but has not been formally adopted by the IRS. Neither the NPC framework as applied to crypto perpetuals nor the NYSBA’s commodity classification analysis has been formally adopted by the IRS. Traders considering this election should document the commodity classification basis carefully.

Straddle Rules

When a trader holds a long spot position and a short perpetual on the same asset simultaneously, that combination may constitute a straddle under IRC §1092. Straddle treatment means a loss on one leg is deferred to the extent there is unrecognized gain on the other leg, and the holding period for long-term capital gain qualification is suspended during the period the offsetting positions are held.

Delta-neutral and basis trade strategies that hold long spot and short perp at the same time should be evaluated for straddle treatment before losses are reported. The straddle analysis depends on accurate cost basis tracking across both positions.

Accounting Considerations

Accurate perp tax reporting depends on accounting infrastructure built for the instrument. Most general crypto tax software was designed for spot trading and handles perp accounting inconsistently or not at all.

Position-level tracking is the foundational requirement. Each open position needs its opening price, size, direction, and opening date. Partial closes are separate realization events and need to be recorded individually at the time of execution. Software that aggregates perp activity at the account level rather than the position level will not produce the data needed for tax substantiation or a §475(f)(2) year-end calculation.

Funding payment recordkeeping requires each payment with its timestamp, amount, direction received or paid, and settlement asset. For linear perps in USDT or USDC this is straightforward. For inverse perps, each funding event requires the fair market value of the crypto at settlement and triggers the additional lot and disposal events described above.

Multi-venue traders face additional reconciliation challenges. A trader running positions across Coinbase Derivatives, Hyperliquid, and Bybit must reconcile three independent data sources with different funding schedules, different settlement currencies, and different reporting practices. Each venue should be reconciled independently and then aggregated to a unified position view before tax positions are taken.

Year-end procedures differ by election. Under NPC treatment without a §475(f)(2) election, open positions at December 31 are not marked to market. Under §475(f)(2) treatment, all open positions must be valued at year-end and unrealized gains and losses recognized. Crypto perpetuals trade continuously, so the venue’s daily settlement timestamp convention should be used to identify the December 31 closing value. Different venues use different cutoffs, and consistency across years matters for defensibility. Position-level pricing data from the exchange at year-end must be captured and retained.

For traders with significant perpetual futures activity across multiple venues, our cryptocurrency accounting services are built to handle position-level perp tracking, funding payment reconciliation, and the three-record alignment that defensible reporting requires.

Limits of This Analysis

This analysis represents our interpretation of authority that has not been definitively resolved by Treasury, the IRS, or any court. The IRS has not issued guidance specifically addressing crypto perpetual futures.

Practitioners advising clients on perp tax treatment should evaluate whether Form 8275 disclosure is appropriate. The right characterization depends on the specific contract structure, the venue, the taxpayer’s overall activity, and the applicable entity structure. This analysis does not address entity-level questions including partnership allocations, withholding obligations for non-US persons, or controlled foreign corporation considerations. Those scenarios require separate analysis.

Frequently Asked Questions

Are crypto perpetual futures Section 1256 contracts?

The answer is unsettled and the analysis differs by venue. Offshore perps on Binance, Bybit, and similar venues are outside Section 1256 on a straightforward basis: no offshore venue has been recognized as a qualified board or exchange for Section 1256 purposes. US perpetual-style contracts on Coinbase Derivatives, Kraken Pro, and Bitnomial technically satisfy the qualified board test, and Coinbase Derivatives issues Form 1099-B for perpetual futures activity. Practitioner commentary and broker reporting commonly treat those contracts as Section 1256.

The more analytically significant question is whether IRC §1256(b)(2)(B) removes those contracts from Section 1256 regardless of exchange listing. That provision categorically excludes commodity swaps from Section 1256 as an independent gating provision. Whether a crypto perpetual constitutes a commodity swap under that provision, given the funding rate mechanism, is the question the existing analysis does not reach. Practitioners taking the Section 1256 position should evaluate whether their analysis addresses it.

How are gains from crypto perps taxed?

It depends on which characterization framework applies. Under notional principal contract treatment, gains on closing a position are ordinary income. Under Section 1256 treatment, net gains receive the 60/40 split where 60 percent is long-term capital gain and 40 percent is short-term capital gain regardless of holding period. Under capital asset treatment, gains are short-term or long-term capital depending on holding period. The framework applied should be consistent across the tax year, documented, and carried forward. Switching frameworks between years raises accounting method consistency questions under §446 and creates audit exposure on prior open years.

Is funding rate income taxable?

Yes, under all three characterization frameworks. Funding received is ordinary income at each settlement regardless of which framework applies to the position itself. It does not defer until the position closes. Funding paid is ordinary expense, deductible as a §162 business expense for active traders in a trade or business. Investors not in a trade or business face a more constrained analysis. Two analytical paths exist: netting funding expense against funding income within the contract under the NPC framework, or treating net funding expense as a §212 investment expense currently suspended under §67(g) through 2025 tax years. Both are discussed in the funding rate section above. The ordinary income character of funding received is the most consistent element across all three frameworks.

Does the tax treatment differ between offshore and US-regulated perpetuals?

The analytical path differs but the outcome under the framework described in this article is the same. Offshore perps are outside Section 1256 because no offshore venue has been recognized as a qualified board or exchange. US-regulated perps technically satisfy that test but are excluded from Section 1256 by the commodity swap exclusion in §1256(b)(2)(B) for the reasons discussed. For both categories, the substantive characterization question between notional principal contract treatment and capital asset treatment still applies.

What is the Form 8275 situation for US perp traders?

Coinbase Derivatives issues Form 1099-B for perpetual futures activity. Where a taxpayer takes a position different from that reporting, Form 8275 disclosure is appropriate. The disclosure should identify the contract type, the venue, the character and timing treatment taken by the taxpayer, and the analytical basis including the §1256(b)(2)(B) commodity swap exclusion and the notional principal contract framework. The disclosure does not guarantee penalty protection but it establishes the good-faith basis for the position.

Do wash sale rules apply to crypto perps?

No, under current law. Wash sale rules under IRC §1091 apply only to stock and securities. Cryptocurrency and crypto derivatives are neither under current law. Loss harvesting through close-and-reopen is permissible without a 30-day restriction. Legislative proposals including the Lummis-Gillibrand Responsible Financial Innovation Act and various Senate Finance Committee proposals would extend wash sale treatment to digital assets. Traders who rely on loss harvesting strategies should monitor that development.

What is the Section 475(f)(2) election and should perp traders consider it?

The Section 475(f)(2) commodities trader election provides mark-to-market accounting with ordinary income and loss treatment, eliminating the capital loss limitation and allowing trading losses to offset ordinary income without restriction. Qualifying requires two showings: a trade or business of trading under the Groetzinger standard, and that the trade or business is in commodities under §475(e)(2). The election must be made by the unextended due date of the return for the year before the election takes effect and cannot be applied retroactively. Form 3115 accompanies the first-year return to formalize the method change.

The self-employment tax treatment of §475(f)(2) ordinary income is not settled by statute or regulation. The §1402(i) exclusion from SE tax applies only to §1256 contract income and is not available here. Traders with material §475(f)(2) income should evaluate the SE tax question separately and consider Form 8275 disclosure of that position. .

How are Hyperliquid perps taxed?

The characterization analysis is the same as for other offshore perpetuals. Hyperliquid is not a recognized qualified board or exchange, so Section 1256 is unavailable. The substantive question between notional principal contract treatment and capital asset treatment applies in the same way as for any offshore perp. There is no Form 1099-B, no Form 1099-DA, and no FCM. Self-reporting from on-chain records is required