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

The approval of perpetual futures contracts in the US could lead to unforeseen tax and regulatory issues for traders if these products are ultimately deemed swaps rather than futures, a matter that has received limited public attention, according to CME Group Chairman and CEO Terry Duffy. 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 continues its legal challenge against the Commodity Futures Trading Commission (CFTC) over the regulator's approval of perpetual futures contracts in the US. Both sides await a federal court decision, which could significantly influence how the US approaches the rapidly growing arena of perpetual futures, including how the Internal Revenue Service (IRS) ultimately taxes these contracts. The dispute centers on whether perpetual futures should be legally treated as futures or swaps. Duffy argued that perpetual contracts, which involve periodic funding payments between long and short positions, should fall under the legal definition of swaps under US law. Unlike traditional futures, perpetual contracts never expire and instead involve traders periodically exchanging funding payments to keep the derivative's price close to that of the underlying asset. Duffy believes this recurring payment exchange satisfies the statutory definition of a swap. If perpetual contracts qualify as futures, many institutional traders could receive the blended tax treatment available 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 deemed swaps, they will be taxed under 'ordinary' taxation, given the IRS has not issued specific guidance on the tax treatment of perpetual futures. Legal experts note that the issue is complex, with the statutory 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, meaning federal courts now 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. As a result, the classification and tax treatment of perpetual futures are likely to be the subject of extensive litigation, with experts predicting a long and drawn-out process. Even if the litigation ultimately clarifies the classification of perpetual contracts, tax treatment may still require separate guidance from the IRS, which is not obligated to adopt the CFTC's interpretation of financial instruments.