The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainties if these products are ultimately classified as swaps rather than futures, a concern voiced by CME Group Chairman and CEO Terry Duffy. In an interview, Duffy pointed out the ambiguity surrounding the tax perspective for all US participants. This concern arises as CME continues its legal challenge against the Commodity Futures Trading Commission (CFTC) regarding the regulator's approval of perpetual futures contracts.
The outcome of this court decision could substantially influence the US approach to the rapidly growing area of perpetual futures, particularly in how the Internal Revenue Service (IRS) taxes these contracts. The dispute centers on whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing they should be considered swaps due to the periodic funding payments between long and short positions, which aligns 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 more complex, emphasizing it as a 'substance over form' question, where the economic function of perpetual futures resembles that of futures, despite their structural similarity to swaps. The broad definition of swaps and the recent elimination of the Chevron doctrine, which reduces deference to agencies' interpretations of ambiguous statutes, add to the uncertainty.
This could lead to a lengthy litigation process, with the Supreme Court potentially playing a significant role in deciding how derivatives laws apply to novel financial products like perpetual futures. Ultimately, the tax treatment may require separate guidance from the IRS, which may not align with the CFTC's interpretation, leaving large institutions with uncertainty over reporting trades involving perpetual futures until regulators, tax authorities, or courts provide clearer guidance.