The approval of perpetual futures contracts in the US could lead to unforeseen tax and regulatory uncertainty for traders if these products are ultimately deemed to be swaps rather than futures, a concern expressed by CME Group Chairman and CEO Terry Duffy. In an interview, Duffy noted that there is ambiguity from a tax perspective for all US participants due to the lack of clarity on whether perpetual futures should be legally treated as futures or swaps. This dispute is currently at the center of a legal challenge by CME against the Commodity Futures Trading Commission (CFTC) over the regulator's approval of perpetual futures contracts. The outcome of this challenge could significantly influence the US approach to perpetual futures, including how the Internal Revenue Service (IRS) taxes these contracts.
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 satisfies the statutory definition of a swap under US law. If perpetual contracts are considered swaps, they would be taxed under 'ordinary' taxation, rather than the blended tax treatment available for futures under Section 1256 of the US tax code. However, legal experts consider the issue more complex, suggesting it is a 'substance-over-form' question that hinges on the economic function of perpetual futures rather than their textual structure. The definition of swaps is broad, leaving room for interpretation, especially with the Supreme Court's 2024 Loper Bright decision reducing deference to agencies' interpretations of ambiguous statutes.
This could lead to a lengthy litigation process, with tax treatment potentially requiring separate guidance from the IRS. Until there is greater clarity from regulators, tax authorities, or the courts, large institutions may face uncertainty over reporting trades involving perpetual futures, potentially leading to tax disputes.