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

The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty if these products are ultimately deemed to be swaps rather than futures, a concern raised by CME Group Chairman and CEO Terry Duffy. This ambiguity stems from the periodic funding payments exchanged between long and short positions in perpetual contracts, which Duffy argues should legally be treated as swaps due to these recurring payment exchanges. Unlike traditional futures, perpetual contracts do not expire and instead involve periodic funding payments to keep the derivative's price aligned with the underlying asset, satisfying the statutory definition of a swap under US law. If perpetual contracts are classified as futures, institutional traders may be eligible for blended tax treatment under Section 1256 of the US tax code, but if they are deemed swaps, they will be subject to ordinary taxation. The IRS has not provided specific guidance on the tax treatment of perpetual futures, and the outcome of the ongoing legal challenge between CME and the Commodity Futures Trading Commission (CFTC) could significantly influence how the US approaches this rapidly growing area. Legal experts, including Rustin Diehl and Jason Gottlieb, note that the issue is complex, with the definition of swaps being extremely broad and the challenge being a substance-over-form question. The Supreme Court's 2024 Loper Bright decision has also shifted the interpretation 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 process of determining the tax implications of perpetual futures is likely to be lengthy and may involve extensive litigation.