The approval of perpetual futures contracts in the US may lead to unforeseen tax and regulatory uncertainty for traders if these products are ultimately classified as swaps rather than futures, a concern raised by CME Group Chairman and CEO Terry Duffy. In an interview, Duffy pointed out the ambiguity surrounding the tax implications for US participants.
The comments come as CME continues to challenge the Commodity Futures Trading Commission's (CFTC) approval of perpetual futures contracts, with the outcome potentially influencing the US approach to this rapidly growing market. A key issue is whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing they should be considered swaps due to the periodic funding payments between long and short positions. Unlike traditional futures, perpetual contracts do not expire and involve recurring funding payments to keep the derivative's price aligned with the underlying asset. Duffy believes this mechanism satisfies the statutory definition of a swap under US law.
The main problem with the current designation is that if perpetual contracts are classified as futures, many institutional traders may receive a blended tax treatment, while if they are classified as swaps, they will be taxed under ordinary taxation. The IRS has not provided guidance on the tax treatment of perpetual futures, and if regulators or courts ultimately conclude they are swaps, market participants may face uncertainty in reporting these positions to the IRS. Legal experts consider the issue complex, with the definition of swaps being extremely broad and the challenge lying in determining whether perpetual futures function more like swaps or futures. The outcome will depend on the court's interpretation, and it is likely to be a long process with potential litigation.
Until there is greater clarity from regulators, tax authorities, or the courts, large institutions may face uncertainty over how to report trades involving perpetual futures.