The approval of perpetual futures contracts in the US may lead to unforeseen tax and regulatory challenges for traders if these contracts are ultimately deemed to be 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 implications for US participants.
The comments come amidst CME's legal challenge against the Commodity Futures Trading Commission (CFTC) regarding the regulator's approval of perpetual futures contracts. The core issue revolves around the legal classification of perpetual futures as either futures or swaps, which significantly influences how the Internal Revenue Service (IRS) will tax these contracts.
Unlike traditional futures, perpetual contracts do not expire and involve periodic funding payments between long and short positions, a mechanism Duffy argues aligns more closely with the definition of a swap under US law. This classification discrepancy could lead to institutional traders receiving a blended tax treatment under Section 1256 of the US tax code if considered futures, or being taxed under ordinary taxation if deemed swaps. Given the novelty of perpetual futures, the IRS has not provided specific guidance on their tax treatment.
Legal experts, such as Rustin Diehl and Jason Gottlieb, emphasize the complexity of the issue, highlighting that while perpetual futures structurally resemble swaps, they function economically like futures, posing a substance-over-form question. The broad definition of swaps and the recent Supreme Court decision eliminating the Chevron doctrine further complicate the matter, suggesting that court interpretations will play a crucial role in determining the tax implications of perpetual futures.
This ambiguity is likely to lead to extensive litigation, with potential implications for tax reporting and compliance for market participants.