The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty if these products are ultimately deemed to be swaps rather than futures, a concern echoed by CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy pointed out the ambiguity surrounding the tax implications for US participants. This ambiguity stems from an ongoing legal challenge by CME against the Commodity Futures Trading Commission (CFTC) regarding the regulator's approval of perpetual futures contracts.
The outcome of this case could significantly influence the US approach to perpetual futures, including how the Internal Revenue Service (IRS) taxes these contracts. The core issue revolves around whether perpetual futures should be legally categorized as futures or swaps, with Duffy arguing that they should be considered swaps due to the periodic funding payments between long and short positions, which aligns with the statutory definition of a swap under US law. If perpetual contracts are classified as futures, institutional traders might receive a blended tax treatment under Section 1256 of the US tax code, treating gains and losses as 60% long-term and 40% short-term capital gains.
However, if they are deemed swaps, they would be subject to 'ordinary' taxation. Given the novelty of perpetual futures, the IRS has not provided specific guidance on their tax treatment. Legal experts view the issue as complex, with the challenge being whether to prioritize the textual structure of perpetual futures, which resembles swaps, or their economic function, which is more akin to futures. The definition of swaps is broad, leaving considerable room for interpretation, especially for new financial products like perpetual futures.
The resolution of this issue will depend on court interpretations, potentially leading to a lengthy process with significant implications for tax reporting and regulatory compliance.