Do Section 1256 Rules Apply to Crypto Options on Regulated Exchanges?
Yes, Section 1256 rules apply to crypto options if they qualify as "non-equity options" and are traded on a regulated exchange. For example, options on regulated Bitcoin futures contracts (which are non-equity) traded on a CFTC-regulated exchange would qualify.
They would be subject to the mark-to-market rule and the 60/40 tax treatment.
Glossar
Section 1256 Rules
Rule ⎊ Section 1256 rules, originating within US tax code, fundamentally treat certain derivative contracts ⎊ including options, futures, and swaps ⎊ as if they were held for 60 days, regardless of their actual holding period.
Crypto Options
Valuation ⎊ Crypto options, representing rights ⎊ not obligations ⎊ to buy or sell a cryptocurrency at a predetermined price before an expiration date, derive valuation from underlying asset price, time to expiry, volatility, and prevailing risk-free interest rates; models like Black-Scholes, adapted for crypto’s unique characteristics, are frequently employed, though parameter estimation presents challenges due to nascent market data and potential for manipulation.
Rules
Framework ⎊ The operational guidelines governing cryptocurrency derivatives, options trading, and related financial instruments establish a layered system of protocols designed to ensure market integrity and participant protection.
Section 1256
Standardization ⎊ This specific tax code provision mandates special treatment for certain regulated futures contracts, which can apply to crypto derivatives traded on designated exchanges under specific conditions.