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

The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty if these products are ultimately classified as swaps rather than futures, a concern raised by CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy noted, 'There's a consequence that nobody's talking about... There's ambiguity right there, from a tax perspective, for all US participants now.' This ambiguity stems from the legal definition of swaps versus futures and how the Internal Revenue Service (IRS) will ultimately tax these contracts. The dispute revolves around whether perpetual futures should be legally treated as swaps due to the periodic funding payments exchanged between long and short positions, which Duffy argues satisfies the statutory definition of a swap under US law. If perpetual contracts are deemed swaps, they will be taxed under 'ordinary' taxation, unlike the blended tax treatment available for futures under Section 1256 of the US tax code. Given the IRS has not issued specific guidance on the tax treatment of perpetual futures, market participants who have been treating them as futures for tax purposes could face uncertainty. Legal experts, including Rustin Diehl and Jason Gottlieb, point out that the issue is complex, involving a 'substance-over-form' question and the broad definition of swaps, which leaves room for interpretation. The outcome of the court decision and potential litigation could significantly influence how the US approaches perpetual futures, with Duffy cautioning that large institutions could face uncertainty over how to report trades involving these contracts.