CME CEO Warns of Potential Tax Risk for US Perpetual Futures

The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory risks if these contracts are ultimately classified as swaps rather than futures, a matter that has garnered little public attention, according to Terry Duffy, Chairman and CEO of CME Group. In an interview with CoinDesk, Duffy stated, 'There's a consequence that nobody's talking about. There's ambiguity right there, from a tax perspective, for all US participants now.' The comments come as CME Group continues its legal challenge against the Commodity Futures Trading Commission (CFTC) over the regulator's approval of perpetual futures contracts in the US. The outcome of this challenge could significantly influence how the US approaches the rapidly growing arena of perpetual futures, particularly in terms of how the Internal Revenue Service (IRS) will tax these contracts. The dispute centers on whether perpetual futures should be legally treated as futures or swaps. Duffy argues that perpetual futures should be classified as swaps due to the periodic funding payments exchanged between long and short positions, which he believes satisfies the statutory definition of a swap under US law. Unlike traditional futures contracts, perpetual contracts do not expire; instead, traders periodically exchange funding payments to keep the derivative's price close to that of the underlying asset. This recurring payment exchange, Duffy contends, aligns with the definition of a swap. The main issue with the current designation, according to Duffy, is that if perpetual contracts are considered futures, many institutional traders could receive a blended tax treatment under Section 1256 of the US tax code, where gains and losses are generally treated as 60% long-term and 40% short-term capital gains. However, if these contracts are classified as swaps, they would be subject to 'ordinary' taxation. Given that perpetual futures are a newer innovation, the IRS has not provided specific guidance on their tax treatment. If regulators or courts ultimately determine that perpetual contracts are swaps rather than futures, market participants who have been treating them as futures for tax purposes could face uncertainty about how to report these positions to the IRS. Legal experts, however, view the issue as more complex, suggesting that while perpetual futures structurally resemble swaps, they function economically like futures, making it a 'substance-over-form' question. The definition of swaps is extremely broad, leaving considerable room for interpretation regarding its application to new financial products like perpetual futures. The outcome will depend on how the court interprets the law, particularly in light of the Supreme Court's 2024 Loper Bright decision, which reduced the deference given to agencies' interpretations of ambiguous statutes. This could lead to a lengthy and complex litigation process, with tax treatment potentially requiring separate guidance from the IRS, which is not bound to adopt the CFTC's interpretation of financial instruments. Until there is greater clarity from regulators, tax authorities, or the courts, large institutions could face uncertainty over reporting trades involving perpetual futures, potentially leading to significant tax implications.