The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty, as the classification of these contracts as swaps or futures remains unresolved, according to CME Group Chairman and CEO Terry Duffy. In an interview, Duffy highlighted the ambiguity surrounding the tax treatment of these contracts, stating that 'there's a consequence that nobody's talking about' and 'ambiguity right there, from a tax perspective, for all US participants now.' The dispute centers on whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing that they should be classified as swaps due to the periodic funding payments exchanged between long and short positions.
This classification could significantly impact the tax treatment of these contracts, as gains and losses from swaps are generally taxed as ordinary income, whereas those from futures are often subject to a blended tax treatment. The IRS has not issued guidance on the tax treatment of perpetual futures, and the outcome of the ongoing legal battle between CME and the Commodity Futures Trading Commission (CFTC) could have far-reaching implications for US traders. Legal experts note that the issue is complex, with the statutory definition of swaps being broad and open to interpretation.
The Supreme Court's 2024 Loper Bright decision has also eliminated the Chevron doctrine, giving federal courts less deference to agencies' interpretations of ambiguous statutes and potentially leading to a more drawn-out process. As a result, market participants may face uncertainty about how to report their trades involving perpetual futures, with Duffy warning that large institutions could be particularly affected. Ultimately, the classification of perpetual futures as swaps or futures will depend on the court's interpretation, and tax treatment may still require separate guidance from the IRS.