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 challenges for traders if these products are ultimately classified as swaps rather than futures, warned CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy pointed out the ambiguity surrounding the tax implications for US participants. The comments were made amidst CME's ongoing legal dispute with the Commodity Futures Trading Commission (CFTC) over the regulator's approval of perpetual futures contracts. The outcome of this case could substantially influence the US approach to the rapidly expanding market of perpetual futures. A key consequence of this dispute is how the Internal Revenue Service (IRS) will ultimately tax these contracts. The issue stems from the legal classification of perpetual futures as either futures or swaps. Duffy argued that perpetual futures should be considered swaps due to the periodic funding payments exchanged between long and short positions, which aligns with the statutory definition of a swap under US law. If perpetual contracts are classified as futures, many institutional traders may be eligible for 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 deemed swaps, they will be subject to ordinary taxation. The IRS has not provided specific guidance on the tax treatment of perpetual futures, which could lead to uncertainty for market participants. Legal experts consider the issue complex, with the challenge lying in determining whether the economic function of perpetual futures aligns more closely with swaps or futures. The definition of swaps is 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. Experts anticipate extensive litigation, and the Supreme Court's decision to eliminate the Chevron doctrine means that federal courts will give less deference to agencies' interpretations of ambiguous statutes, potentially leading to a larger role for judges in deciding how existing derivatives laws apply to novel crypto products.