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ICE Bitcoin Futures Contracts

October 29, 2019

More and more, bitcoin and other cryptocurrencies are taking root in the mainstream commercial world. This has occurred in tandem with the IRS’ recognition of digital currency as a legitimate, taxable property. One way that cryptocurrency is taking root is by being accepted as currency by more and more mainstream firms. Another way is by being marketed to mainstream investors. This latter way has recently shown itself in a very prominent fashion. Back on September 23, Intercontinental Exchange (ICE) launched bitcoin futures contracts through its partner firm, Bakkt. According to Bakkt’s CEO Kelly Loeffler, Bakkt is designed to enable consumers and institutions to seamlessly buy, sell, store and spend digital assets. Unlike other bitcoin futures contracts, though, this new futures contract offered by ICE and Bakkt pays out in bitcoin upon settlement.

A Review of Basics

In this post, we’re going to review the basics of this offering and discuss its general significance. MC&C will continue to keep up-to-date with what’s happening in the virtual currency world as we know that this world is becoming increasingly important. And the tax implications of this world are quite significant, as we’ve touched on in the past.

Overview of ICE’s Bitcoin Futures Contracts

As mentioned, in late September ICE and Bakkt issued the first physically settled bitcoin futures contracts. ICE is actually the owner of the New York Stock Exchange. With this offering, ICE and Bakkt hoped to entice more traditional investors to participate in the burgeoning cryptocurrency space. In this context, “physically settled” means that the futures contracts will pay out in bitcoin itself, rather than cash. It doesn’t mean, though, that the bitcoin will take on any kind of physical reality. Bakkt already has a number of high-profile institutional investors, including a Microsoft-backed entity known as M12, and Boston Consulting Group. Bitcoin, and cryptocurrency in general, is still an asset class which primarily attracts investors from outside the mainstream investment community. These ICE futures are designed to change that. These contracts show that cryptocurrency is taken seriously as an investment vehicle.

Basics of Futures Contracts

Futures are legal agreements to either buy or sell a certain commodity at a specific price and specific time. This means that these agreements are essentially a bet on whether a given commodity’s price will rise or fall over time. Futures are a class of derivatives, meaning that their value is based on a probabilistic model. Virtual currencies, such as Bitcoin, are considered commodities under the Commodity Exchange Act, or CEA. Further, the U.S. Commodity Futures Trading Commission, or CFTC, has jurisdiction when a virtual currency is used in a derivatives contract.

An Example

Suppose an investor buys a futures contract to sell a certain quantity of bitcoin for $12,000 per unit at a specific date. If the bitcoin price falls well below $12,000 by that time, then the investor has bet correctly, and will be able to sell for above market price.

Futures Could Improve the Bitcoin Market

Again, ICE and Bakkt hoped that this new futures launch would improve the bitcoin market. However, early signs indicate that the improvement has been minimal. In spot markets, the reaction to the launch by ICE was very lukewarm, with the bitcoin price rising just 0.5%. In some ways, this early difficulty is a continuation of ongoing problems.

Back in 2017, Cboe Global Markets tried to launch its own version of bitcoin futures contracts, but ran into problems quickly and eventually stopped adding new ones. The lukewarm reaction to the launch by ICE and Bakkt is surprising to some professionals in the cryptocurrency community. Many professionals believed that these futures would be a game-changer and lead to serious improvement in bitcoin’s market condition. The early response clearly hasn’t been tremendous. But, the story isn’t over, and there’s still a possibility that these Bakkt bitcoin futures contracts could have a substantial impact.

The IRS Response is Evolving

As we’ve documented, bitcoin and cryptocurrency have come a long way. And the IRS has evolved its cryptocurrency taxation in tandem. With its Notice 2014-21, and then now Revenue Ruling 2019-24, the IRS has expanded its application of tax principles to cryptocurrency. This new offering by ICE and Bakkt is part of the general development of bitcoin and cryptocurrency. Even though Wall Street’s response has been slow, it’s possible things will turn around.

Contact MC&C to Learn About Bitcoin Futures Taxation

If you have cryptocurrency gains, or you may have them at some point in the near future, reach out to us. At Mackay, Caswell & Callahan, P.C., we stay on top of the cryptocurrency space and help clients with back tax debt based on cryptocurrency. Our clientsoften have cryptocurrency tax debt, other federal tax debt, or NY State tax debt. We can advise on whether you need to file an OIC, amended return, installment agreement, or pursue a different course. Navigating this complex situation isn’t easy. That’s why we offer these articles and encourage readers to get in touch with us. Contact one of our top New York City tax attorneys today and we will get you the assistance you need.

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