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

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 Shehan Chandrasekera

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.

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