The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory risks if these products are ultimately classified as swaps rather than futures. CME Group Chairman and CEO Terry Duffy warned of this overlooked consequence in an interview, citing ambiguity from a tax perspective for all US participants.
The comments come as CME continues to challenge the Commodity Futures Trading Commission (CFTC) over its approval of perpetual futures contracts. The outcome of this legal battle could significantly influence the US approach to perpetual futures and how the Internal Revenue Service (IRS) taxes these contracts. The core issue revolves around whether perpetual futures should be legally treated as futures or swaps due to the periodic funding payments exchanged between long and short positions.
Duffy argues that these recurring payments align with the statutory definition of a swap under US law. If perpetual contracts are deemed swaps, they would be taxed under 'ordinary' taxation, unlike the blended tax treatment available for futures under Section 1256 of the US tax code.
However, legal experts consider the issue complex, with the definition of swaps being broad and the economic function of perpetual futures resembling that of traditional futures. The resolution of this matter may require court interpretation and could lead to significant litigation, with potential implications for tax reporting and regulatory compliance for market participants.