The approval of perpetual futures contracts in the US may lead to unforeseen tax and regulatory issues for traders if these contracts are ultimately classified as swaps rather than futures, according to CME Group Chairman and CEO Terry Duffy. In an interview, Duffy emphasized the ambiguity surrounding the tax implications for US participants. The comments come as CME challenges the Commodity Futures Trading Commission's approval of perpetual futures contracts, with the outcome potentially influencing the US approach to these rapidly growing financial products.
A key consideration is how the Internal Revenue Service will tax these contracts, given the dispute over whether perpetual futures should be treated as futures or swaps. Duffy argues that perpetual contracts should be considered swaps due to the periodic funding payments exchanged between long and short positions, which aligns with the statutory definition of a swap under US law.
However, if perpetual contracts are classified as futures, institutional traders may receive a blended tax treatment, with gains and losses treated as 60% long-term and 40% short-term capital gains. In contrast, if they are classified as swaps, they will be subject to ordinary taxation. The IRS has not provided guidance on the tax treatment of perpetual futures, and the outcome of the CFTC's approval and any subsequent court ruling could lead to uncertainty for market participants.
Legal experts note that the issue is complex, with the definition of swaps being extremely broad and the economic function of perpetual futures resembling that of traditional futures. The Supreme Court's decision to eliminate the Chevron doctrine may also impact how federal courts interpret ambiguous statutes, potentially leading to a lengthy litigation process. As a result, traders may face uncertainty over how to report trades involving perpetual futures, and Duffy warns that large institutions could be at risk of tax issues if the classification of these contracts changes.