What Is the Risk of Misclassifying a Crypto Derivative for Tax Purposes?

The primary risk is underreporting tax liability. Misclassifying a non-1256 derivative as a 1256 contract could lead to an incorrect application of the 60/40 rule, potentially understating short-term (ordinary income) gains.

Conversely, misclassifying a 1256 contract as a non-1256 could lead to overpaying tax by missing out on the 60/40 benefit. Penalties and interest may apply.