The US tax code treatment of crypto for a buy-and-hold investor is, by 2026 standards, settled. Each disposal is a capital gain or loss; staking and airdrops are ordinary income at receipt; per-wallet basis applies from 2025 onward. The buy-and-hold investor reading our other tax articles has the framework they need.
The active trader has a different set of problems. Once a portfolio includes futures, perpetuals, short positions, options, or any combination of long spot plus an offsetting derivative on the same underlying, three older parts of the tax code start to apply. None of them was written with crypto in mind, and the IRS has issued limited guidance on how each one maps to digital assets. This article is a practitioner-level walkthrough of the three most common.
Section 1259: constructive sale of appreciated financial positions
The most under-discussed risk for active crypto traders is 26 U.S. Code section 1259, the constructive-sale rule. Enacted in 1997 to close a deferral mechanism known as the "short against the box", section 1259 deems a taxpayer to have sold an appreciated financial position if they enter into an offsetting transaction that substantially eliminates their risk of loss.
The classic stock example: a taxpayer holds 1,000 shares of AAPL with a $50 cost basis, currently worth $200 each. They want to lock in the $150 gain without realising it for tax purposes, so they short 1,000 shares of AAPL against their long position. The economic position is now flat: any gain on the long is offset by a loss on the short. Pre-1997, the short could be held indefinitely, deferring the recognition of the gain. Section 1259 ended this by deeming the long position sold at fair market value the moment the offsetting short is opened.
The statute applies to "appreciated financial positions", defined to include any position with respect to "stock, debt instrument, or partnership interest". Crypto is not on that list. The IRS has not issued specific guidance extending section 1259 to crypto, and the literal reading of the statute is that the rule does not apply.
The catch: the same statute applies to "futures or forward contracts to deliver substantially identical property". A bitcoin futures contract is, by definition, a contract to deliver bitcoin. A taxpayer holding 1 BTC in spot and shorting 1 BTC of futures with the same expiry has, on the literal reading, entered into "an offsetting notional principal contract with respect to substantially identical property". Whether that triggers section 1259 depends on whether the IRS treats the spot BTC as falling within the categories the statute lists.
The conservative position - and the one most tax advisers will give a client - is to assume that crypto-on-crypto offsets via futures could trigger constructive sale, and to plan around it: either by allowing the offset to expire within the statutory 30-day safe harbour (section 1259 has a narrow carve-out for short-term offsets that close before year-end and stay closed for at least 60 days), or by using a derivative on a different but correlated asset.
Section 1092: straddles
26 U.S. Code section 1092, the straddle rules, addresses a different problem: a taxpayer holding offsetting positions in actively-traded property, where a loss on one position can be deducted while the gain on the other is deferred.
The classic example: a taxpayer holds two positions in offsetting silver futures, one long and one short. At year-end, the long has a $10,000 loss and the short has a $10,000 gain. Without the straddle rules, the taxpayer could close the loss leg in December (deducting $10,000 against current-year gains) and close the gain leg in January (deferring $10,000 to the following tax year). Section 1092 prevents this by disallowing the loss to the extent of unrecognised gain in the offsetting position.
The straddle rules apply to "personal property of a type which is actively traded". The IRS has not formally extended this to crypto, but the statutory language is broad enough that a literal reading would include any actively-traded crypto asset. The practical implication for a trader who runs a paired-positions strategy across spot and a derivative is that any losses recognised at year-end may be partially or fully deferred until the offsetting gain is also recognised.
Unlike section 1259, section 1092 does not deem a sale; it just defers a loss. The economic effect is similar: the trader cannot pick which leg to recognise first.
Section 988: foreign currency rules and stablecoins
The third trap is more subtle and applies to a class of trades that has grown in retail volume: USD-pegged stablecoin pairs. 26 U.S. Code section 988 contains the rules for foreign currency transactions. The default treatment under section 988 is that gains and losses are ordinary income, not capital gains.
The IRS has not formally classified stablecoins as foreign currency. The Notice 2014-21 framework treats all convertible virtual currency, including USDC and USDT, as property. Under that framework, a trade between USDC and ETH is a property-for-property exchange producing a capital gain or loss on the USDC leg.
The wrinkle is that the gain or loss on the USDC leg is, in nearly every case, $0 or pennies, because USDC trades at $1 plus or minus a few basis points. Tax tools should report this correctly, but a tool that aggregates micro-disposals or ignores them can leave the taxpayer with a return that does not include the dust gains and losses. In a year with thousands of stablecoin-paired trades, the dust can add up to tens of dollars of unreported gain. None of this is a compliance risk for a small trader, but it is the kind of detail that triggers automated mismatch letters from the IRS for a high-volume one.
If the IRS or Treasury were to reclassify stablecoins as foreign currency under section 988 (a position floated in the FY2026 Greenbook, though not as a formal proposal), the treatment would shift from capital to ordinary, and from de minimis to potentially material for active traders.
How active traders should structure for this
Three rules of thumb that fall out of the audit above:
- Document the intent of every offsetting position. The constructive-sale and straddle rules both have safe harbours that depend on the taxpayer not having the intent to permanently hold the offset. Contemporaneous documentation - dated trading-plan notes, position-sizing rationale - is the single best defence in audit.
- Keep spot and derivatives in separate accounts where possible. Some of the offset risk is reduced if the long and short legs are clearly attributable to different account holders or to a hedging account distinct from the speculative book. This is bookkeeping, not law, but it is the bookkeeping the IRS will look at first.
- Run the year-end review before year-end. Most of the rules above can be planned around if the trader knows about them in November. They cannot be planned around in March of the following year. The SafeFinance Tax-Loss Harvesting tool is designed for this kind of November-December review and surfaces open positions across exchanges so the trader can see the full book in one place.
The honest summary: the IRS has not issued targeted guidance on any of the three sections above as applied to crypto. The literal statutory language reaches some crypto trades and not others. A trader running a strategy that involves offsetting positions should be talking to a CPA who understands both crypto and the older code sections, not relying on tax software alone to flag the issues.