The approval of perpetual futures contracts in the US may lead to unforeseen tax and regulatory uncertainty for traders if these contracts are ultimately deemed to be swaps rather than futures, CME Group Chairman and CEO Terry Duffy warned. In an interview, Duffy highlighted the ambiguity surrounding the tax implications for US participants.

The comments come amidst CME's ongoing legal challenge against the Commodity Futures Trading Commission (CFTC) over the regulator's approval of perpetual futures contracts in the US. The outcome of the federal court decision could significantly influence how the US approaches the rapidly growing arena of perpetual futures, particularly in terms of how the Internal Revenue Service (IRS) taxes these contracts. The dispute centers on whether perpetual futures should be legally classified as futures or swaps.

Duffy argued that perpetual futures, which involve periodic funding payments between long and short positions, should be considered swaps under US law due to these recurring payment exchanges. Unlike traditional futures, perpetual contracts do not expire and instead use funding payments to keep the derivative's price aligned with the underlying asset.

Duffy pointed out that if perpetual contracts are considered futures, many institutional traders could receive a blended tax treatment, but if they are deemed swaps, they would be taxed under 'ordinary' taxation. However, the IRS has not provided specific guidance on the tax treatment of perpetual futures.

Legal experts noted that the issue is complex, with the textual structure of perpetual futures resembling swaps but functioning economically like futures, posing a 'substance-over-form' question. The definition of swaps is broad, leaving room for interpretation, particularly with the Supreme Court's 2024 Loper Bright decision, which reduced federal courts' deference to agencies' interpretations of ambiguous statutes. This could lead to a lengthy litigation process, with tax treatment potentially requiring separate guidance from the IRS.

Until there is greater clarity from regulators, tax authorities, or the courts, large institutions may face uncertainty over reporting trades involving perpetual futures, according to Duffy.