The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory complexities if these products are ultimately deemed to be swaps rather than futures, a concern that has received minimal public attention, according to CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy emphasized the ambiguity surrounding the tax implications for US participants. The comments come as CME continues to challenge the Commodity Futures Trading Commission (CFTC) over its approval of perpetual futures contracts, with the outcome potentially influencing the US approach to these rapidly growing financial instruments.
A key consideration is how the Internal Revenue Service (IRS) will tax these contracts, given the dispute over 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. This classification discrepancy could lead to tax treatment uncertainties, as gains and losses from futures are generally taxed as 60% long-term and 40% short-term capital gains, whereas swaps are taxed under 'ordinary' taxation. The IRS has not provided specific guidance on the tax treatment of perpetual futures, and if these contracts are ultimately deemed swaps, market participants may face uncertainty in reporting their positions to the IRS.
Legal experts acknowledge the complexity of the issue, noting that while perpetual futures resemble swaps structurally, they function economically like futures, making it a 'substance-over-form' question. The definition of swaps is broad, leaving room for interpretation, and the outcome will depend on the court's interpretation. The process is expected to be lengthy, with potential litigation and the need for separate IRS guidance on tax treatment. Until regulators, tax authorities, or courts provide clarity, large institutions may face uncertainty over reporting trades involving perpetual futures, highlighting the need for careful consideration of the tax implications.