Trading crypto futures may offer tax advantages

There are many reasons traders use futures– futures contracts allow you to use leverage to speculate on price movements, protect and hedge other assets in your portfolio, and diversify your holdings. However, there’s another, lesser-known benefit: futures trading can offer tax advantages.

When you trade futures, you pay taxes on your capital gains– just like you would when you trade equities. But unlike equities, which are taxed based on how long you hold them, regulated futures trading profits are taxed using a 60/40 rule. 60% of gains are taxed as long-term gains and 40% are taxed as short-term gains.

The IRS defines short term gains as profits from selling an asset that you’ve held for one year or less. They treat short term gains as ordinary income, so you’re taxed at your ordinary tax rate (which ranges from 10% to 37%, depending on your income and filing status). As of tax year 2023, long term capital gains rates are 0%, 15%, or 20%, also based on your income and filing status and are typically lower than your ordinary tax rate. This means that 60% of profit from futures trading may be taxed at a lower rate than your ordinary tax rate.

Here's an example:

Let’s say you’re a futures trader in a 35% income bracket reporting $1,000 profit for the year. Apply the 60/40 rule:

60% x $1,000 = $600, taxed at a long term capital gains rate of 20% = $120

40% x $1,000 = $400, taxed at a short term capital gains rate of 35% = $140

You would pay $260 in taxes for your futures trading profits.

Now imagine you’re trading equities in a 35% income bracket and report $1,000 in profit for the year. Assuming you held the equities for under a year, the profit would be taxed at the short term capital gains rate of 35%.

$1,000 x 35% = $350 in taxes

As you can see, futures trading may provide tax benefits to traders.