How the IRS Taxes Crypto Futures
The IRS classifies certain crypto futures contracts as Section 1256 contracts, which receive special tax treatment under the Internal Revenue Code. For qualifying contracts, gains and losses are split 60/40 regardless of how long you held the position: 60% is treated as long-term capital gain (or loss) and 40% is treated as short-term capital gain (or loss). This blended rate is almost always lower than the pure short-term rate that applies to spot crypto trades held under a year, which is taxed at your ordinary income rate.
To qualify as a Section 1256 contract, the futures must be traded on a regulated US exchange — such as CME Bitcoin or Ethereum futures. These contracts are also subject to mark-to-market accounting at year-end, meaning any open positions are treated as if they were sold at fair market value on December 31, even if you haven't closed them yet. This mark-to-market gain or loss is reported on your taxes for that year, and your cost basis resets going into the new year.
Section 1256 contracts get favorable 60/40 tax treatment — meaning even short-term futures trades are taxed at blended rates, not the full short-term rate. A trader in the 37% income bracket pays an effective rate of roughly 26.8% on net futures gains instead of the full 37%.
What Makes Futures Tax Treatment Different From Spot Trading
When you buy and sell Bitcoin on a spot exchange, the hold period determines your tax rate. Hold for less than one year and your gain is taxed as ordinary income (short-term). Hold for more than a year and you qualify for the preferential long-term capital gains rate of 0%, 15%, or 20% depending on your income. This creates an incentive for long-term holding in spot markets.
Futures work completely differently. Because of the 60/40 rule, it doesn't matter whether you closed your position in one hour or six months — the gain is always split 60% long-term and 40% short-term. The mark-to-market requirement also changes the timing: you must recognize gains and losses on December 31 each year based on the value of any open positions, which can create tax liability even in years where you didn't close a single trade. This is a meaningful difference that catches many traders off guard at tax time.
Perpetual Contracts and the Tax Question
Perpetual contracts — or "perps" — are the dominant product on most offshore crypto exchanges like Bybit, Binance Futures, and OKX. Unlike traditional futures, perpetuals have no expiration date and use a funding rate mechanism to keep the contract price anchored to the spot price. The tax treatment of perps is currently an unsettled area of law that the IRS has not formally addressed.
Most tax professionals take the position that perpetual contracts traded on unregulated offshore exchanges do not qualify as Section 1256 contracts, because they are not traded on a regulated US exchange. This means perp gains and losses would be taxed as ordinary capital gains — short-term if the position was open for less than a year, long-term if over a year. Funding payments received are likely ordinary income; funding payments made may be deductible as a trading expense. Given the uncertainty, it's important to consult a tax professional who is familiar with crypto derivatives before filing.
How to Calculate Gains and Losses on Crypto Futures
For Section 1256 contracts, you calculate your net gain or loss from all closed positions during the year, then add any mark-to-market adjustment for open positions at December 31. The net amount is then split 60/40 between long-term and short-term treatment. Losses from Section 1256 contracts can be carried back up to three years and applied against prior Section 1256 gains — a carryback provision that doesn't exist for regular capital losses, which can only be carried forward.
For perpetuals and other non-qualifying contracts, you track each position individually: the entry price, the exit price, any funding payments in or out, and any fees paid. Your gain or loss on each closed position is the difference between proceeds and cost basis, net of fees. Funding payments received during the year add to your taxable income; funding payments you made may offset trading income depending on how they're classified. This transaction-by-transaction record-keeping is why futures tax compliance is considerably more complex than spot trading.
Form 6781 — Reporting Section 1256 Gains and Losses
Qualifying Section 1256 contracts are reported on IRS Form 6781 (Gains and Losses From Section 1256 Contracts and Straddles), not on Schedule D directly. You list your total gains and losses from Section 1256 contracts, and the form calculates the 60/40 split. The long-term portion flows to Schedule D Part II, and the short-term portion flows to Schedule D Part I, where they are combined with your other capital gains and losses.
If you have a net Section 1256 loss for the year, you can elect to carry it back three years using the special carryback rules — Form 6781 includes this election. If you don't make the carryback election, the loss carries forward as a capital loss. Most crypto tax software that supports futures will generate a pre-filled Form 6781, but you should verify that each contract in your history has been correctly identified as a Section 1256 contract versus a regular capital gain transaction.
How Count On Sheep Handles Futures Tax Reporting
Count On Sheep is one of the few crypto tax platforms that natively handles futures tax reporting, including Section 1256 classification and Form 6781 generation. When you import futures transaction history, the platform auto-classifies each contract type and applies the correct tax treatment — Section 1256 with 60/40 splitting for qualifying exchange-traded futures, and standard capital gains treatment for perpetuals.
The platform also handles the most common data problems that plague futures traders: margin transfers between spot and futures wallets being misread as taxable events, funding payments being inconsistently categorized across different exchange exports, and year-end mark-to-market calculations for open positions. If you traded futures on multiple exchanges, Count On Sheep consolidates everything into a single unified report, which is what your CPA actually needs to file accurately.