The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory risks if these products are ultimately deemed to be swaps rather than futures, according to CME Group Chairman and CEO Terry Duffy. This issue has garnered little public attention despite its significant implications. In an interview with CoinDesk, Duffy highlighted the ambiguity surrounding the tax treatment of perpetual futures, citing the potential consequences for US participants. The comments come as CME continues to challenge the Commodity Futures Trading Commission's (CFTC) approval of perpetual futures contracts in the US.
A federal court decision is pending, and its outcome could substantially influence the US approach to the rapidly growing market of perpetual futures. One key consequence 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.
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 satisfy the statutory definition of a swap under US law. Unlike traditional futures, perpetual contracts do not expire and instead involve periodic funding payments to maintain the derivative's price close to the underlying asset. If perpetual contracts are deemed swaps, they will be taxed under ordinary taxation, rather than the blended tax treatment available for futures under Section 1256 of the US tax code.
However, the IRS has not provided specific guidance on the tax treatment of perpetual futures, leaving market participants uncertain about how to report these positions. Legal experts note that the issue is complex, with the statutory definition of swaps being extremely broad and encompassing a wide range of financial instruments. The Supreme Court's 2024 Loper Bright decision has also eliminated the Chevron doctrine, allowing federal courts to play a larger role in interpreting ambiguous statutes and their application to novel financial products like perpetual futures. As a result, the classification and tax treatment of perpetual futures are likely to be the subject of extensive litigation, with significant implications for market participants and regulatory clarity.