Are Cryptocurrency Options Generally Treated as Section 1256 Contracts?

Cryptocurrency options traded on regulated exchanges, such as options on Bitcoin futures, are generally treated as Section 1256 contracts. However, options traded on unregulated or decentralized exchanges may not qualify.

If a crypto option is not Section 1256, it is typically taxed under general capital gains rules, where the holding period (short-term vs. long-term) is critical. The IRS has not issued specific guidance on all types of crypto derivatives.