Perps in crypto are perpetual swap contracts: derivatives that let you bet on a token’s price going up or down, with leverage, without ever holding the coin itself. Unlike traditional futures, they never expire, so a position stays open until you close it or the exchange liquidates you for running out of collateral. BitMEX introduced the format in 2016, and it now dominates crypto trading, with combined centralized and decentralized exchange volume topping $90 trillion in 2025.
How a Perp Position Works
A perp is a synthetic contract. It’s an accounting entry on an exchange’s books, not a token sitting in your wallet. Go long on a Bitcoin perp at $60,000, and the exchange credits your account as the price rises and debits it as the price falls. Short positions work in reverse: you profit when the price drops.
Because there’s no settlement date, you’re not forced to roll into a new contract every quarter the way you would with a crude oil future. You hold as long as your collateral survives. That eliminates rollover costs and the basis risk of switching between expiring contracts, which is a real advantage for anyone wanting continuous exposure.
But no expiration also means the contract has no natural anchor to the spot price. Traditional futures converge with spot at settlement. Perps need a different mechanism.
The Funding Rate
That mechanism is the funding rate, a periodic payment that flows directly between long and short traders. The exchange doesn’t collect it; it moves from one side of the market to the other.
The logic is simple. When the perp trades above spot, longs pay shorts. When it trades below spot, shorts pay longs. That creates an incentive to trade against the premium, which pulls the contract back toward the underlying asset’s actual price.
Most platforms calculate funding from two pieces: a small fixed interest rate (typically 0.01% per eight-hour interval) and a premium index measuring the gap between perp and spot. On Binance, as long as the premium index sits between -0.04% and 0.06%, the funding rate defaults to 0.01%.1Binance. Introduction to Binance Futures Funding Rates When the perp trades at a larger premium or discount, the rate adjusts.
Frequency varies. Eight hours (three payments a day) is the industry standard; Coinbase applies funding every hour.2Coinbase. Understanding Funding Rates in Perpetual Futures and Their Impact Over weeks of one-sided market conditions, those fractions of a percent compound and can quietly gut a position’s profitability. If you’re long during a sustained bull run, you’re paying funding every interval.
Some traders also read funding as a sentiment signal. Persistently high positive rates suggest the market is overextended long; deeply negative rates suggest heavy short positioning. Neither guarantees a reversal, but extreme funding has historically preceded sharp moves in the opposite direction.
Leverage, Margin, and Liquidation
Every perp position requires collateral, called margin. Initial margin is what you post to open the trade. Leverage is the multiplier: at 10x, $1,000 controls a $10,000 position; at 50x, it controls $50,000. The higher the leverage, the smaller the price move needed to wipe out your collateral.
Maintenance margin is the minimum equity your account must keep to hold the position open. It’s lower than initial margin, roughly half on some platforms.3Crypto.com Help Center. Margin Balance Details and Smart Cross Margin Policy When adverse price movement pushes equity toward that threshold, liquidation begins.
This is where newer traders lose accounts fast. Opening a 100x position sounds exciting, but at 100x, a 0.5% move against you triggers liquidation. The advertised maximum leverage and the leverage that actually survives real market conditions are very different numbers.
To avoid liquidating you on brief price spikes, most exchanges use a “Mark Price” rather than the last trade on their own order book. Mark Price is a weighted average drawn from spot across multiple exchanges, which makes it harder for a single large order to cascade liquidations. When Mark Price hits your liquidation price, the exchange closes the position, aiming for the “bankruptcy price” where your margin reaches zero. Surpluses go into the exchange’s insurance fund; shortfalls are covered from it.
Isolated vs. Cross Margin
Most exchanges offer two margin modes, and the choice matters.
With isolated margin, you assign a fixed amount of collateral to a single position. If that trade liquidates, you lose only what you allocated. Your other positions and remaining wallet balance stay untouched, and the liquidation price is predictable.
With cross margin, your entire account balance backs every open position. A winning trade can subsidize a losing one by pushing liquidation further away, but if multiple positions move against you at once, you can lose the whole account in a single event.
Isolated margin is generally safer when running multiple positions independently. Cross margin gives more flexibility on any single trade at the cost of exposing everything. Neither is a default; it’s a risk decision you should make deliberately for each position.
Who Can Legally Trade Perps in the U.S.
The CFTC treats major cryptocurrencies like Bitcoin and Ethereum as commodities, which puts perpetual swaps under the Commodity Exchange Act. Leveraged crypto trading for retail customers must occur on a CFTC-registered designated contract market or a registered foreign board of trade.4U.S. Securities and Exchange Commission. SEC-CFTC Joint Staff Statement (Project Crypto-Crypto Sprint) Platforms offering leveraged crypto derivatives to U.S. retail traders without that registration violate federal law.
For years, that meant U.S. retail traders were effectively locked out. Offshore exchanges like BitMEX and Binance offered perps to global users but technically excluded or restricted American accounts, though enforcement was often thin and many U.S. traders used VPNs to route around the block. In 2021, a federal court ordered BitMEX to pay $100 million in civil penalties for operating an unregistered trading platform and for anti-money laundering violations.5Commodity Futures Trading Commission. Federal Court Orders BitMEX to Pay $100 Million for Illegally Operating a Cryptocurrency Trading Platform and Anti-Money Laundering Violations Trading swaps outside a registered exchange otherwise generally requires qualifying as an Eligible Contract Participant, which needs more than $10 million invested on a discretionary basis (or more than $5 million if the trade hedges a commercial risk).6Office of the Law Revision Counsel. 7 USC 1a – Definitions Most individuals don’t qualify.
The picture changed when CFTC-registered exchanges began listing perpetual-style futures for U.S. retail customers. Coinbase Derivatives, operating as a registered DCM, launched perpetual futures products with leverage capped around 10x, well below the 100x or 125x common offshore.7Commodity Futures Trading Commission. Acting Chairman Pham Announces First-Ever Listed Spot Crypto and Perpetual Futures Products Expect standard identity verification on any regulated platform: government ID, address, Social Security number, and source-of-funds questions. VPN screening is also part of the compliance stack.
How Perp Gains Are Taxed
The IRS treats digital assets as property, so closing a perp position is a taxable event.8Internal Revenue Service. Digital Assets Holding period determines the rate. Positions held a year or less generate short-term capital gains taxed at your ordinary income rate; those held longer qualify for lower long-term rates. Because most perp trades open and close within days or weeks, short-term treatment applies to nearly all of them.
Section 1256 Doesn’t Apply
Some traders ask whether crypto perps get the favorable 60/40 tax treatment that Section 1256 of the Internal Revenue Code gives certain regulated futures. They don’t. The statute specifically excludes “commodity swaps” and similar agreements from Section 1256 status.9Office of the Law Revision Counsel. 26 U.S. Code 1256 – Section 1256 Contracts Marked to Market A crypto perpetual swap fits that exclusion, so every dollar of profit on a short-term perp is taxed at your full ordinary rate.
Wash Sales and 1099-DA Reporting
As of early 2026, the wash sale rule that blocks a loss claim if you repurchase a substantially identical security within 30 days does not apply to cryptocurrency. You can close a losing crypto position and immediately reopen it to harvest the loss. Legislation to close this gap has been proposed repeatedly, and a current discussion draft in Congress would extend the wash sale rule to digital assets. If enacted, that would remove one of the few tax edges crypto traders still have.
Brokers are required to file Forms 1099-DA for most digital asset transactions, but IRS Notice 2024-57 temporarily exempts certain categories, including “notional principal contracts,” from that reporting until further guidance is issued.8Internal Revenue Service. Digital Assets Since perpetual swaps share structural characteristics with notional principal contracts, your exchange may not issue a 1099-DA for these trades. That doesn’t shrink your tax obligation; it just means you’re responsible for tracking the gains yourself.
FBAR for Offshore Exchange Accounts
Trading perps on a foreign exchange triggers a separate obligation. If the aggregate value of your foreign financial accounts exceeds $10,000 at any point in the year, you have to file a Report of Foreign Bank and Financial Accounts (FBAR) with FinCEN.10FinCEN. Report Foreign Bank and Financial Accounts Penalties reach $10,000 per violation for non-willful failures and substantially more for willful ones. Many traders on offshore platforms don’t know this obligation exists.
Exchange Risk Is the Real Risk
The largest risk in perp trading isn’t leverage or funding. It’s the exchange itself. Depositing funds into a centralized platform to trade perpetual swaps means trusting that platform to hold your money, execute honestly, and stay solvent. FTX showed in November 2022 how badly that trust can be broken. Traders with open perp positions had no way to close trades or withdraw funds when the exchange halted operations, and billions in customer assets were misappropriated.
CFTC-registered platforms in the U.S. reduce some of this risk. Registered exchanges must segregate customer funds from company assets under CFTC Part 190 rules, and positions are protected by regulated clearinghouse default procedures. That’s a real structural protection offshore platforms don’t offer. It doesn’t eliminate operational failures.
Decentralized perp platforms like Hyperliquid take a different route by removing the custodial intermediary. Trades execute on-chain, and funds stay in your wallet until a position opens. The tradeoff is smart contract risk: bugs or exploits in the code can drain funds, and there’s no insurance fund or regulatory backstop.
Whichever route you take, the question stays the same. Where are your funds sitting, and what protects them if the entity holding them fails? Regulated custody, segregation, and transparent reserves reduce the risk. None of them make it zero.