Crypto futures: How they work and tax implications

In 2025, global crypto derivatives trading volume reached roughly $85 trillion, far outpacing spot market volume. Derivatives markets often lead in price discovery, so major price moves can appear there before showing up on spot charts.

This has led to a rising interest in crypto futures – financial contracts that let traders speculate on cryptocurrency prices without owning the assets involved. Instead of buying Bitcoin (BTC) or Ethereum (ETH), traders use these derivative contracts to take positions based on expected price movements. In contrast to more traditional buy-and-hold investing, futures emphasize price exposure, leverage, and timing rather than ownership.

In this article, we’ll explain what crypto futures are and how they work. We’ll also explore the risks involved and what you’ll need to know about futures during tax season.

What are crypto futures?

A crypto future is a derivative contract, where a trader agrees in advance on the price they’ll buy or sell a currency at. The futures contract borrows its value from the crypto involved, but the trader doesn't have to hold the assets.

When a trader opens a futures position, the exchange records a price agreement but doesn’t transfer coins. The platform then calculates gains and losses based on price changes, and settles them with crypto or fiat inside the trading account.

This setup makes futures a tool for trading price movements rather than owning crypto. Futures traders get some exposure to digital assets without having to open crypto wallets and manage on-chain transfers.

How does crypto futures trading work?

Crypto futures trading relies on these fundamental mechanics:

• Long and short positions: Futures traders choose to speculate on the direction of an asset’s price. They can opt for long positions and benefit from rising prices, or focus on short positions to earn from falling prices.
• Derivative contracts: Each trade opens a contract that’s linked to a specific cryptocurrency and defines important details like position size and settlement rules.
• No asset ownership: The exchange records a price agreement, not a token transfer. So traders never have to hold the crypto, and they realize profits in liquid form immediately upon closing their positions.
• Dated and perpetual futures: Market participants can choose between standard futures that expire on fixed dates and settle at market prices, or perpetual futures that have no expiration date and stay open as long as the trader maintains enough collateral.
• Margin and leverage: Leverage acts as a multiplier for capital, since by providing a small amount of margin as collateral, traders can control much larger positions. For example, with 5x leverage, a $2,000 margin allows a trader to hold a $10,000 position.

What’s the difference between crypto futures and spot trading?

Even though futures and spot trading can happen on the same crypto exchange, spot trading involves actually buying and selling assets. This makes the risk profiles for these trading strategies different – spot trading exposes capital only to market volatility, while futures trading adds liquidation and funding risk.

In addition, leverage only exists in futures markets, while spot trading requires full capital upfront. That makes it easier to establish large positions with futures. Traders also get more flexibility when they opt for futures, since they can go long or short instantly and adjust exposure without transferring assets.

For these reasons, spot trading usually suits long-term investors who care about asset ownership, while futures trading suits those focused on price action and risk management.

What types of crypto futures contracts are available?

Crypto futures contracts fall into two categories, each serving specific trading styles and risk preferences.

Dated futures

Dated futures are contracts with fixed expiration dates. Each contract specifies a future settlement date when its position will close automatically.

These contracts track the expected future price of the connected asset. For that reason, traders often use them to express medium-term views or hedge exposure around specific events, such as protocol upgrades or macro announcements.

As the expiration date approaches, the futures price converges with the spot price (the current market rate). At settlement, the exchange that issued the contract will finalize profit or loss based on the difference between the contract price and the market price.

Dated futures are common on regulated exchanges, and they appeal most to institutional traders who prefer clean settlement schedules and defined contract terms.

Perpetual futures

Perpetual futures lack expiration dates, so traders can hold positions indefinitely as long as they maintain sufficient margins. These contracts are very popular because they’re flexible and offer continuous exposure.

To keep prices aligned with spot markets, perpetual futures use a funding rate mechanism. Traders pay or receive funding every eight hours, depending on whether long or short positions dominate the market.

What are the advantages of trading crypto futures?

Active market participants choose crypto futures because these contracts:

• Allow speculation in both directions: Traders can profit from upward and downward price movements.
• Charge lower trading fees for large positions: Futures exchanges reward liquidity providers and high-volume traders with competitive fee structures.
• Increase capital efficiency due to leverage: Traders can deploy futures using less upfront capital when compared to spot purchases.
• Support hedging strategies: Investors who also hold crypto assets can offset downside risk by opening short futures positions.
• Offer access to deep liquidity: Even during volatile periods, futures markets often maintain tighter spreads and higher volumes than spot markets.

What are the risks of trading crypto futures?

Futures also come with market-specific risks that can lead to quick capital loss. These risks include:

• Forced liquidation: If the market moves against a position and the margin drops below the maintenance threshold, the exchange will liquidate the position. This often results in a total loss of collateral.
• Aggressive funding costs: In popular markets, funding costs can be high.
• Operational vulnerability: Technical issues on an exchange, such as order execution delays during high volatility, can prevent investors from closing losing trades.
• Margin and carry risks: Margin calls can require you to invest more funds or sell at inconvenient times, leading to unexpected losses.
• Complexity and learning curve: Using leverage effectively is challenging for most beginners, so futures trading requires a deep understanding of contract mechanics and disciplined risk management.

What are the tax considerations for crypto futures traders?

In the United States, profits and losses from crypto futures become taxable when positions close. It doesn’t matter whether you leave funds on an exchange or withdraw them – each closed trade creates a reportable gain or loss.

Most crypto futures trading settles in cash or stablecoins, not digital assets. So these trades typically fall under capital gains rules, with frequent trading treated as short-term gains taxed at ordinary income rates. Some regulated contracts also qualify for Section 1256 treatment, which applies a fixed split between long-term and short-term rates.

Because futures involve leverage and funding payments, traders need clear records of dates, entry prices, exit prices, and fees so they can file crypto tax forms correctly.

Track your crypto futures activity with CoinTracker

Crypto futures allow traders to take positions without owning assets, which offers a lot of flexibility while supporting hedging and speculation. However, futures also come with risks due to volatility and complexity, and they can be challenging to account for in your taxes.

Worried about reporting your crypto taxes? CoinTracker makes it simple. Join over three million users who trust us for hassle-free tax reporting. Start for free today.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.

FAQ

What’s leverage in crypto futures?

Leverage lets investors control larger positions with less capital. Small price moves affect the full position size, not just the margin the trader put down, which increases potential gains and losses.

What’s open interest in crypto futures?

In futures crypto markets, open interest is defined as the total number of open contracts at a given time. When open interest increases, that usually means traders are taking a lot of new positions. And when open interest declines, traders are closing positions and/or exchanges are liquidating them.

Are crypto futures regulated?

In the U.S., crypto futures contracts fall under federal oversight when they trade on regulated exchanges. So products listed on U.S. platforms must follow CFTC rules. However, many crypto futures available to retail traders operate offshore and don’t offer the same regulatory protections.