CME's Duffy Highlights Overlooked Tax Risk Associated with US Perpetual Futures

The approval of perpetual futures contracts in the US could lead to unforeseen tax and regulatory issues for traders if these contracts are ultimately classified as swaps rather than futures, a matter that has received little attention, according to Terry Duffy, Chairman and CEO of CME Group. In an interview with CoinDesk, Duffy stated, 'There's a consequence that nobody's talking about. There's ambiguity right there, from a tax perspective, for all US participants now.' The comments come as CME continues its legal challenge against the Commodity Futures Trading Commission (CFTC) regarding the regulator's approval of perpetual futures contracts in the US. The outcome of this case could significantly influence how the US approaches the rapidly growing market of perpetual futures, including how the Internal Revenue Service (IRS) taxes these contracts. The dispute centers on whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing that they should be considered swaps due to the periodic funding payments exchanged between long and short positions. Unlike traditional futures, perpetual contracts do not expire and instead involve periodic funding payments to keep the derivative's price close to the underlying asset's price. Duffy believes this mechanism satisfies the statutory definition of a swap under US law. The main issue with the current designation is that if perpetual contracts are considered futures, many institutional traders could receive a blended tax treatment under Section 1256 of the US tax code, where gains and losses are treated as 60% long-term and 40% short-term capital gains. However, if these contracts are classified as swaps, they would be taxed under 'ordinary' taxation, and given the novelty of perpetual futures, the IRS has not provided specific guidance on their tax treatment. Legal experts consider the issue complex, with one attorney noting, 'The challenge here is that textually, by the structure, perpetual futures look a lot like a swap, but economically they perform a lot like futures. It's really a substance-over-form question … function versus text.' The definition of swaps is extremely broad, leaving room for interpretation regarding its application to new financial products like perpetual futures. The outcome will depend on the court's interpretation, and the process is likely to be lengthy, with potential litigation and the need for the IRS to provide separate guidance on tax treatment.