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

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, CME Group Chairman and CEO Terry Duffy warned. In an interview with CoinDesk, Duffy noted that there is ambiguity surrounding the tax implications for US participants due to the lack of clarity on whether perpetual futures should be treated as swaps or futures. The comments come as CME continues to challenge the Commodity Futures Trading Commission's (CFTC) approval of perpetual futures contracts in the US, with the outcome of the case potentially influencing how the US approaches the growing market of perpetual futures. A key issue is how the Internal Revenue Service (IRS) will tax these contracts, with Duffy arguing that perpetual futures should be considered swaps due to the periodic funding payments exchanged between long and short positions, which would subject them to ordinary taxation rather than the blended tax treatment available for futures under Section 1256 of the US tax code. However, legal experts consider the issue more complex, stating that while perpetual futures resemble swaps in structure, they function like futures, making it a substance-over-form question. The definition of swaps is also extremely broad, leaving room for interpretation regarding its application to new financial products like perpetual futures. The Supreme Court's 2024 Loper Bright decision has eliminated the Chevron doctrine, allowing federal courts to play a larger role in deciding how existing derivatives laws apply to novel crypto products. As a result, the classification and tax treatment of perpetual futures are likely to be resolved through a lengthy litigation process, with tax authorities, regulators, or courts needing to provide greater clarity on the matter.