A perpetual swap is a derivative contract that tracks the price of an underlying asset without ever expiring, letting you hold a leveraged long or short position for as long as you can meet margin requirements. Perpetual swaps are cash-settled, so no cryptocurrency actually changes hands, and a funding-rate payment between longs and shorts keeps the contract price anchored to the spot market. In the United States, access for retail traders is sharply limited by the Commodity Futures Trading Commission, and the tax treatment is less favorable than the 60/40 split that applies to regulated futures.
How Perpetual Swaps Differ From Traditional Futures
Both are derivatives, meaning value comes from an underlying asset rather than ownership of it. The dividing line is expiration. Standard futures have a last trading day followed by settlement, where positions are closed or physically delivered.1Cornell Law Institute. 17 CFR Appendix C to Part 38 – Demonstration of Compliance That a Contract Is Not Readily Susceptible to Manipulation A perpetual swap has no such date. You can hold a position for five minutes or five months, and the contract never settles unless you close it or get liquidated.
Going long profits when the underlying rises; going short profits when it falls. The entire contract is cash-settled: you receive or pay the difference between entry and exit price. Nothing about the trade requires you to own the asset. That makes perpetual swaps purely speculative instruments where you trade price exposure alone.
The absence of expiration is what makes these contracts popular with active traders. Traditional futures force you to roll positions forward as expiration approaches, which adds cost and administrative friction. Perpetual swaps remove that step. But removing the expiration date also removes the natural force that pulls a futures contract toward spot as settlement nears. Funding rates fill that gap.
How Funding Rates Keep the Price Anchored
Funding rates are periodic payments exchanged directly between long and short holders to pull the contract price toward spot. On most major platforms, payments happen every eight hours, producing three settlement windows a day.2Binance. Introduction to Binance Futures Funding Rates When the contract trades above spot, longs pay shorts, giving longs a financial reason to close and drag the price down. When it trades below spot, shorts pay longs, and the correction runs the other way.
The rate has two components: a fixed interest rate and a premium index that measures how far the contract has drifted from spot. The default interest component on many platforms is 0.01% per eight-hour interval, roughly 0.03% daily.2Binance. Introduction to Binance Futures Funding Rates Small in isolation. But 0.01% paid three times a day compounds to roughly 11% annualized, and in volatile markets funding rates spike well above baseline, pushing the annualized cost past 100%. This is the carry cost that new traders consistently underestimate.
When positioning tilts heavily one way, funding stays lopsided for extended periods. Traders on the wrong side of the funding direction bleed money every settlement window regardless of whether the price moves. Some traders exploit persistent funding by pairing a spot position against a perpetual in the opposite direction, staying market-neutral while collecting payments. The strategy works until funding flips, at which point a single reversal can erase weeks of collected payments.
Margin, Leverage, and Liquidation
Opening a perpetual swap requires posting collateral, called initial margin. Leverage multiplies your exposure beyond that deposit. At 10x, $1,000 controls a $10,000 position. At 100x, the same $1,000 controls $100,000, and a 1% adverse move wipes out your margin.
Maintenance margin is the minimum equity needed to keep a position open. When your balance drops below it, the exchange’s liquidation engine closes the position automatically, without warning. The goal is to close before the account goes negative, so one trader’s debt doesn’t become the platform’s problem. Thresholds vary: smaller positions might require maintenance margin as low as 0.25% of position value, while larger positions face progressively higher requirements because they’re harder to unwind without moving the market.
Liquidations don’t run against the last traded price on the platform. They run against a mark price, which combines an index price pulled from multiple external spot venues with a decaying funding basis. That distinction matters. A single large trade could momentarily spike the platform’s ticker without reflecting a real market move; using the mark price prevents a whale from deliberately triggering liquidations by pushing price on one venue.
Cross Margin vs. Isolated Margin
Most platforms offer two collateral modes. In cross margin, your entire account balance backs every open position. A profitable trade can subsidize a losing one, reducing liquidation risk on any single position, but a catastrophic loss on one trade can drain the whole account.
Isolated margin confines collateral to the amount you assign to a specific trade. If that trade goes to zero, you lose only what you allocated to it. The rest of your balance is untouched. The tradeoff is that isolated positions get liquidated sooner, because there’s no extra equity to absorb a drawdown. Isolated is the safer default for most traders; cross is a tool for experienced traders managing correlated positions.
Auto-Deleveraging
Proceeds from liquidations flow into an exchange-managed insurance fund that covers shortfalls when positions can’t be closed fast enough. During extreme volatility, liquidation cascades can overwhelm that fund. When it happens, exchanges activate auto-deleveraging, forcibly reducing the positions of profitable traders to absorb the deficit. The queue typically prioritizes accounts with the highest combination of unrealized profit, effective leverage, and position size. The traders doing best get cut first. You can be sitting on a winning trade and have the exchange close part of it without consent because someone else’s liquidation produced an unrecoverable loss. The possibility of forced closure during volatile markets is a structural feature of these products, not an edge case.
The US Regulatory Status of Perpetual Swaps
The picture in the United States is unsettled and carries real enforcement risk. The CFTC treats perpetual swaps as falling within its jurisdiction under the Commodity Exchange Act.3CFTC. Commodity Exchange Act and Regulations Whether they are properly classified as swaps or as futures remains formally open. In April 2025, the CFTC issued a request for comment asking whether perpetual derivatives fit the traditional futures model or the swap model under the CEA.4CFTC. Request for Comment on the Trading and Clearing of Perpetual Derivatives That classification will shape which registration and trading rules apply.
Under either classification, offering these contracts to US retail customers without proper registration violates federal law. The CFTC has enforced this. In 2021, a federal court ordered BitMEX to pay $100 million for illegally operating a cryptocurrency trading platform and accepting orders from US customers for derivative contracts including perpetual swaps.5CFTC. Federal Court Orders BitMEX to Pay $100 Million for Illegally Operating a Cryptocurrency Trading Platform Other offshore platforms have either faced similar actions or preemptively blocked US IP addresses.
For individuals, the CEA defines who can legally participate in off-exchange derivative contracts. An “eligible contract participant” is generally someone with more than $10 million invested on a discretionary basis, or more than $5 million if the transaction hedges existing risk.6Legal Information Institute (LII). Definition: Eligible Contract Participant from 7 USC 1a(18) Most retail traders don’t clear these thresholds. A handful of CFTC-registered exchanges have begun offering limited perpetual swap products to US customers, but availability is far narrower than what offshore platforms provide.
The CFTC’s 28-day actual delivery rule reinforces the point. A retail commodity transaction is treated as a futures contract unless the buyer takes full possession and control of the digital asset within 28 days.7Federal Register. Retail Commodity Transactions Involving Certain Digital Assets Perpetual swaps are cash-settled by definition. No delivery ever occurs, which places them squarely within CFTC reach regardless of how a platform markets them.
How Perpetual Swaps Are Taxed
The tax treatment is less favorable than some traders assume. Section 1256 of the Internal Revenue Code provides a 60/40 split, where 60% of gains are taxed at long-term capital gains rates and 40% at short-term rates, for certain qualifying contracts such as regulated futures. Section 1256 explicitly excludes “any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement.”8Office of the Law Revision Counsel. 26 US Code 1256 – Section 1256 Contracts Marked to Market Perpetual swaps almost certainly fall under that “similar agreement” catch-all, meaning the 60/40 treatment doesn’t apply. Gains and losses are taxed as ordinary short-term or long-term capital gains based on your holding period.
Traders who conduct a trade or business in securities can elect mark-to-market accounting under Section 475(f). The election treats all open positions as sold at fair market value on the last business day of the tax year, converting unrealized gains and losses into realized ones. It must be filed by the due date of the tax return for the year before it takes effect, and late elections are generally not allowed.9Internal Revenue Service. Topic No. 429, Traders in Securities The definition of “security” under Section 475(c)(2) includes notional principal contracts, which covers swaps. For an active trader who meets the IRS’s activity thresholds for trader status, the election can simplify reporting and let net losses be deducted as ordinary losses without the $3,000 capital loss limitation.
Starting in 2026, US digital asset brokers must report transactions on Form 1099-DA. For covered securities, brokers must report cost basis, date acquired, and gain or loss to the IRS. A covered security is a digital asset acquired after 2015 in an account where the broker provides custodial services. For noncovered securities, including assets acquired before January 1, 2026, basis reporting is optional.10Internal Revenue Service. Instructions for Form 1099-DA The Form 1099-DA instructions do not explicitly mention perpetual swaps, so categorization may vary by platform. Regardless of what a broker reports, you remain responsible for accurately calculating and reporting your own gains and losses on your return.