How Is a Decentralized Finance (DeFi) Derivative Contract Taxed?

DeFi derivative contracts, such as those on decentralized exchanges (DEXs), are generally not Section 1256 contracts because they are not traded on a qualified regulated exchange. They are typically treated as standard capital assets.

The tax calculation is complex, requiring the tracking of cost basis and fair market value in the native crypto, which is then converted to USD for reporting.