The approval of perpetual futures contracts in the US may lead to unforeseen tax and regulatory challenges for traders if these contracts 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 that the ambiguity surrounding the tax implications for US participants has received little attention. The comments come as CME continues to challenge the Commodity Futures Trading Commission (CFTC) over its approval of perpetual futures contracts, with a federal court decision pending.
The outcome could significantly impact how the US approaches the rapidly growing market of perpetual futures, particularly in terms of taxation by the Internal Revenue Service (IRS). 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.
Unlike traditional futures, perpetual contracts do not expire and instead involve periodic funding payments to maintain the derivative's price close to the underlying asset. Duffy contends that these recurring payments meet the statutory definition of a swap under US law. The main issue with the current designation, according to Duffy, is that if perpetual contracts are considered futures, many institutional traders may receive a blended tax treatment, with gains and losses treated as 60% long-term and 40% short-term capital gains. However, if these contracts are deemed swaps, they will be subject to 'ordinary' taxation.
Given the novelty of perpetual futures, the IRS has not provided specific guidance on their tax treatment. If regulators or courts ultimately conclude that perpetual contracts are swaps, market participants who have been treating them as futures for tax purposes may face uncertainty when reporting these positions to the IRS. Legal experts, including Rustin Diehl and Jason Gottlieb, note that the issue is complex, with the definition of swaps being extremely broad and encompassing a wide range of financial products. The Supreme Court's 2024 Loper Bright decision has also eliminated the Chevron doctrine, allowing federal courts to play a larger role in interpreting ambiguous statutes.
As a result, the classification of perpetual futures may be subject to extensive litigation, with tax authorities potentially providing separate guidance on their treatment. Until regulators, tax authorities, or courts provide clarity, large institutions may face uncertainty over how to report trades involving perpetual futures, highlighting the need for greater guidance to avoid potential tax risks.