CME's Duffy Warns of Looming Tax Risk for US Perpetual Futures

The approval of perpetual futures contracts in the US may lead to unforeseen tax and regulatory issues for traders if these contracts are ultimately deemed to be swaps rather than futures, according to CME Group Chairman and CEO Terry Duffy. In an interview, Duffy highlighted the ambiguity surrounding the tax implications for US participants. The comments come as CME continues to challenge the Commodity Futures Trading Commission's approval of perpetual futures contracts, with the outcome potentially influencing the US approach to these rapidly growing financial products. At the heart of the dispute is whether perpetual futures should be treated as futures or swaps under the law. Duffy argues that perpetual contracts should be classified as swaps due to the periodic funding payments between long and short positions, which he believes satisfies the statutory definition of a swap. This classification could significantly impact the tax treatment of these contracts, as gains and losses from swaps are taxed under 'ordinary' taxation, unlike the blended tax treatment available for futures under Section 1256 of the US tax code. The IRS has not provided guidance on the tax treatment of perpetual futures, leaving market participants uncertain about how to report these positions. Legal experts note that the issue is complex, with the statutory definition of swaps being broad and encompassing, leaving room for interpretation. The Supreme Court's decision to eliminate the Chevron doctrine may also play a role in how courts interpret the application of derivatives laws to novel financial products like perpetual futures. The lack of clarity may lead to litigation, with tax authorities, regulators, or courts ultimately providing guidance on the classification and tax treatment of perpetual contracts.