Bitcoin Futures – Investor Implications

On December 10, 2017, the Chicago Board Options Exchange (CBOE) became the world’s first exchange to offer futures contracts for Bitcoin. Shortly after, the Chicago Mercantile Exchange (CME) followed suit in launching their own futures for Bitcoin on December 17, 2017. Many believed that the introduction of Bitcoin futures would have an immediate negative effect on the price of Bitcoin and cryptocurrencies of the like; however, prices have continued to climb in the short run.

The common question in many Bitcoin investors’ mind is “what effect will the introduction of futures have on Bitcoin?” We at Cloud Tax Accountant have had the opportunity to speak with some of the local innovators in the blockchain space and have put together a list of some of the implications that might arise as a result of the introduction of Bitcoin futures:

Financial institutions and investors can build “short” positions in Bitcoin

Prior to the introduction of Bitcoin futures, it was incredibly difficult (if not impossible) to build a “short” position in Bitcoin. Now investors can build short positions in Bitcoin by entering into contracts (futures) to sell Bitcoin at a future date at a prescribed price.

Businesses can hedge against Bitcoin fluctuations

Businesses that accept Bitcoin for their products or services can now enter into futures contracts to sell Bitcoin at a fixed price in the future. This will allow businesses to more effectively manage their Bitcoin volatility exposure and could lead to more businesses accepting Bitcoin for their products or services.

Increased legitimacy and liquidity

The introduction of Bitcoin futures will allow professional and institutional investors to build price exposure in Bitcoin within the confines of a regulated exchange, such as the CBOE or CME. This will help investors avoid the risks associated with holding Bitcoin in an online wallet (liquidity risk, security risk).

Introduction of Bitcoin Futures ETFs

The introduction of Bitcoin futures will allow financial institutions to create ETFs with Bitcoin futures as the underlying asset rather than actual Bitcoin. REX ETFs, VanEck and First Trust have all filed Bitcoin futures ETFs with the SEC, hoping to be first to market.

Tax implications for investors

Gains for trading/ investing for longer periods:
Gains on bitcoin and other cryptocurrency are treated similar to either trading or buying and holding commodities. Any gains are taxable based on intent. For example, if you are actively trading for profits, this would be considered business income. On the other hand, if you have a buy and hold strategy, once you sell your positions the gains would be treated as a capital gain for tax purposes (capital gains are taxed at a lower rate since only 50% of the gain is taxable).

Are trading bitcoin or alternative coins for other cryptocurrency dispositions and thus taxable?

There has been a lot of speculation that keeping your positions and gains within the cryptocurrency asset class is not taxable. Some positions even make logical sense since a lot of the tokens are built on top of the Ethereum blockchain for example. However, when it comes to CRA they will always look at the intent of transaction. For example, if you are looking to invest or trade for capital gains/business profits this will treated as such. Therefore, we recommend you seek professional advice from a qualified tax accountant that understands cryptocurrency.

Cloud Tax Accountant is Canada’s first Accounting & Advisory Firm for Blockchain

If you are looking for tax advisory or have any questions that we can assist you, please contact us at [email protected].