Does Physical Settlement Impact the Tax Treatment of the Derivative Transaction?

Yes, physical settlement can impact the tax treatment. In many jurisdictions, the actual delivery of the underlying asset can trigger a capital gains or loss event on the asset itself for the party delivering it.

For the party receiving it, the cost basis of the asset is established. Cash settlement, however, typically results in a simple gain or loss on the derivative contract, which may be treated as ordinary income or a capital gain depending on the contract type and jurisdiction.