The approval of perpetual futures contracts in the US could lead to unforeseen tax and regulatory uncertainty for traders if these contracts are ultimately classified as swaps rather than futures, a matter that has garnered little attention, CME Group Chairman and CEO Terry Duffy warned. In an interview with CoinDesk, Duffy emphasized the ambiguity surrounding the tax implications for US participants.
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, with the outcome potentially influencing the US approach to the rapidly growing arena of perpetual futures. A key consequence, according to Duffy, is how the Internal Revenue Service (IRS) will ultimately tax these contracts.
The dispute centers on whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing they should be classified as swaps due to the periodic funding payments exchanged between long and short positions, satisfying the statutory definition of a swap under US law. If perpetual contracts qualify as futures, many institutional traders could receive a blended tax treatment, but if they are classified as swaps, they will be taxed under ordinary taxation, potentially leading to uncertainty for market participants who have been treating them as futures for tax purposes. Legal experts, however, note that the issue is complex, with the definition of swaps being extremely broad and the challenge being a substance-over-form question.
The outcome will depend on how the court interprets the law, and it is likely to be a long, drawn-out process, with potential litigation and the need for separate guidance from the IRS.