The approval of perpetual futures contracts in the US could lead to unforeseen tax and regulatory challenges for traders if these contracts are ultimately classified as swaps rather than futures, a concern raised by CME Group Chairman and CEO Terry Duffy. In an interview, Duffy pointed out the ambiguity surrounding the tax implications for US participants. The issue is part of an ongoing legal dispute between CME and the Commodity Futures Trading Commission (CFTC) over the regulator's approval of perpetual futures contracts. The outcome of this case could significantly influence how the US approaches perpetual futures, including how the Internal Revenue Service (IRS) taxes these contracts.
At the heart of the dispute is whether perpetual futures should be legally treated as futures or swaps due to the periodic funding payments between long and short positions. Duffy argues that these contracts should be considered swaps under US law because of these recurring payments.
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. This discrepancy could lead to uncertainty for market participants who have been treating perpetual futures as futures for tax purposes.
Legal experts, such as Rustin Diehl and Jason Gottlieb, note that the issue is complex, with the definition of swaps being broad and the economic function of perpetual futures resembling that of futures. The resolution of this issue may depend on court interpretation, given the elimination of the Chevron doctrine, which previously allowed agencies more latitude in interpreting ambiguous statutes. The process is expected to be lengthy, with potential litigation and the need for the IRS to provide separate guidance on tax treatment. Until there is clarity, institutions may face uncertainty in reporting trades involving perpetual futures, highlighting the need for regulators, tax authorities, or courts to provide clearer guidelines.