As announced by the CFTC, new bitcoin derivatives were self-certified by the CME, the Chicago Board of Trade (CBOE), and the Cantor Exchange this week. That news means that bitcoin futures and binary options will soon be listed and provide another way to trade bitcoin. While the CFTC did not actually approve the new contracts, its involvement may benefit traders of bitcoin futures.
Trading bitcoin futures has advantages over trading real bitcoin. Besides leverage and shorting, bitcoin futures receive a preferential or lower tax rate on gains. Trading actual bitcoin could mean any gains are taxed as ordinary income. For example, if one trades bitcoin and is in the 35% tax bracket, then a gain of $10,000 would mean taxes of $3,500 due to the government. But with bitcoin futures, the amount due is only $2,600.
For tax purposes, it appears that bitcoin futures will qualify as Section 1256 contracts. That designation means that sixty percent of the gains are taxed as long-term capital gains and the remainder as short-term capital gains. It also results in the favorable tax rate. Section 1256 contracts are futures contracts that are subjected to marking for market for margin purposes and trade on a qualified board or exchange (QBE).
A QBE is a domestic exchange that operates under the oversight of the CFTC such as the CME or Chicago Board of Exchange. The CFTC regulates futures on commodities and two years ago it stake a claim on regulating bitcoin futures. In a case against Coinflip Inc, the CFTC said among other things that bitcoin was a commodity; that meant futures on bitcoin would be regulated by the CFTC.
In 2014, the IRS classified bitcoin for tax purposes as property rather than as a commodity. As property, gains from trading bitcoin can be subjected to ordinary income tax rates, which can be large for people in high tax brackets. But those same people could have lower tax bills when trading bitcoin futures rather than real bitcoin.
Disclaimer: This post is intended only for educational purposes. It should not be relied upon for investment or tax advice. Interested parties should instead consult with their investment and tax advisers.