The approval of perpetual futures contracts in the US may lead to unforeseen tax and regulatory issues if they are ultimately deemed swaps rather than futures, according to CME Group Chairman and CEO Terry Duffy. This ambiguity could affect US participants, with the Internal Revenue Service's tax treatment of these contracts hanging in the balance.
The dispute revolves around the legal classification of perpetual futures, with Duffy arguing they should be considered swaps due to the periodic funding payments exchanged between long and short positions. Unlike traditional futures, perpetual contracts do not expire and involve recurring funding payments to maintain the derivative's price close to the underlying asset. If perpetual contracts are classified as 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. This could lead to uncertainty for market participants who have been treating them as futures for tax purposes.
Legal experts consider the issue complex, with the definition of swaps being extremely broad and the economic function of perpetual futures resembling that of traditional futures. The outcome of the court battle between CME and the Commodity Futures Trading Commission will significantly influence the US approach to perpetual futures, and the tax treatment may require separate guidance from the IRS.