The reason three classification frameworks have coexisted for years without converging into a consensus is that Perpetual Futures are, by design, a futures contract deliberately built to never expire — and the entire existing tax classification architecture is built on the implicit assumption that a contract eventually expires.
Traditional futures expire and settle, and audit rules naturally grew up around "what happens at settlement." Perpetuals use the Funding Rate mechanism to artificially eliminate the concept of expiration, letting the contract persist indefinitely — a genuine advantage for the trading experience, but a structural mismatch for applying existing audit frameworks: you can't apply settlement-based logic because it never settles, and you can't fully apply ordinary spot-asset logic because the funding rate mechanism doesn't exist in spot trading at all. All three classification frameworks are, in some sense, forcing an existing framework onto something that doesn't quite fit it, which explains why none of them has fully convinced everyone.
Most coverage focuses on how the 60/40 treatment is more tax-favorable, while rarely mentioning the legal risk lurking behind adopting it — the commodity swap exclusion under Section 1256(b)(2)(B).
The 60/40 split genuinely tends to produce a better tax rate than treating all gains as ordinary short-term income, which is why many traders prefer this classification. But "the broker issued a 1099-B using 60/40 math" and "this classification is actually legally sound" are two different things — the former just reflects how the broker's own reporting system is configured, not that the IRS or a court has confirmed a perpetual's Funding Rate mechanism doesn't constitute a commodity swap. In other words, traders choosing the 60/40 treatment may be enjoying a lower tax rate while carrying a legal uncertainty that most existing analysis hasn't actually resolved.
The most likely path to resolving this issue isn't the IRS proactively issuing new guidance — it's a trader getting audited first, the dispute reaching litigation, and a court ruling that actually sets the tone.
Tax-code gray areas are frequently resolved not through an agency voluntarily clarifying things, but through an individual dispute working its way to court, with the ruling becoming the de facto rule afterward. The current state — three classifications coexisting, each with its defenders, none settled — means the first trader who actually gets audited and chooses to fight rather than settle could have a case outcome that effectively determines how the entire market handles this question for years to come. That's exactly why anyone adopting any of these classifications right now should keep unusually thorough documentation: if you happen to be that case, the completeness of your records is what decides the odds.
For ordinary traders, the most practical impact here is that tax software hasn't caught up with the kind of trading you're actually doing, and you have to fill that gap yourself.
Most mainstream crypto tax software was originally designed around spot trading — buy, sell, calculate gain or loss, relatively straightforward. Perpetual Futures funding settlements happen frequently (commonly every 8 hours), in small amounts, simultaneously across multiple exchanges — a data pattern quite different from the spot-trading model the software was built for, and the result is that software frequently misses, misrecords, or simply doesn't support these transactions at all. That means if you're trading perpetuals, you can't fully trust an auto-generated report — at minimum, spot-check whether funding settlement records were actually captured and classified correctly.
Perpetual Futures never expire. They stay pinned to the spot price through a Funding Rate mechanism that settles every 8 hours — longs or shorts, whichever side is out of balance, pay the other a periodic fee. This mechanism works smoothly on the trading side, but on the tax side, the IRS has issued no guidance whatsoever specifically addressing crypto perpetual futures. That might sound like good news for a gray area — nobody's watching, so nobody's checking — but in practice it's the opposite: no clear rule means you have to pick a defensible classification yourself, and be ready to explain why if asked.
Current practice among tax professionals splits roughly into three positions on how perpetuals should be characterized. The first treats them as a Notional Principal Contract (NPC): under this logic, gains or losses realized at closing are ordinary income or loss, not capital gain, and the funding rate itself is characterized as a swap-style payment calculated against a notional principal — a treatment consistent with Treasury's existing regulations on interest rate swaps. The second applies Section 1256's 60/40 split treatment — 60% long-term, 40% short-term, regardless of actual holding period — and platforms like Coinbase Derivatives do issue Form 1099-B and routinely apply this split. The third, a minority position, simply treats perpetuals as ordinary capital assets, taxed as long-term or short-term gains based on actual holding period.
The Section 1256 position runs into a legal obstacle most analyses haven't actually worked through: IRC §1256(b)(2)(B) categorically excludes "commodity swaps and similar agreements" from Section 1256 treatment, regardless of whether a contract otherwise qualifies. The question is whether the funding rate mechanism that keeps a perpetual pinned to spot price counts as this kind of commodity swap. If it does, the 60/40 treatment may not hold up legally no matter what a broker's 1099-B says. Most of the existing analysis advocating for Section 1256 treatment hasn't actually reached this exclusion question.
Across all three frameworks, one element stays consistent: funding received is treated as ordinary income at the moment each settlement occurs — not deferred until the position closes. Funding paid, if you're an active trader operating as a trade or business, is deductible as an ordinary business expense; if you're a passive investor rather than an active trader, the deduction is more constrained — typically netted against funding income received, or treated as a §212 investment expense, which is currently suspended through 2025 under a separate provision.
Trade perpetuals on an offshore venue (Binance, Bybit, OKX, Hyperliquid, dYdX), and Section 1256 treatment is essentially unavailable — no offshore exchange or decentralized protocol has been recognized as a "qualified board or exchange" under Section 1256's requirements, so the NPC or ordinary-capital-asset characterizations still apply. Trade on a US-regulated venue (Coinbase Derivatives, Kraken Pro, Bitnomial), and these platforms technically satisfy the "qualified exchange" test — but the commodity swap exclusion mentioned above leaves it genuinely ambiguous whether that qualification actually holds for perpetuals specifically.
Most general-purpose crypto tax software was built for spot trading and handles perpetuals inconsistently, or not at all — which usually means assembling the records yourself: position-level tracking, the timestamp and amount of every funding settlement, year-end valuations, and reconciling all of it across multiple exchanges. More importantly, whichever classification you choose — NPC, Section 1256, or ordinary capital asset — needs to stay consistent across the entire tax year, be documented, and carry forward into the next year; switching classifications year to year raises accounting-method consistency questions under IRC §446. If your reported position diverges from how a broker's 1099-B characterizes it, attaching a Form 8275 disclosure is the approach current audit practice recommends.
⚠️ This article was researched against the most current regulations and official guidance available at the time of writing, but tax rules change frequently, and the applicable rules can vary by jurisdiction and individual circumstance. This content is intended to help you understand concepts and general direction — it does not constitute formal tax or legal advice. Before filing, please verify current rules directly with the official tax authority in your jurisdiction, or consult a qualified tax professional.