The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory risks if these products are ultimately deemed to be swaps rather than futures, according to CME Group Chairman and CEO Terry Duffy. In an interview, Duffy highlighted the ambiguity surrounding the tax implications for US participants. The issue arises from a dispute over whether perpetual futures should be legally classified as futures or swaps, with Duffy arguing that they should be considered swaps due to the periodic funding payments exchanged between long and short positions. This classification could affect how the Internal Revenue Service (IRS) taxes these contracts, potentially leading to uncertainty for market participants who have been treating them as futures for tax purposes.
Independent 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 outcome of the court battle between CME and the Commodity Futures Trading Commission (CFTC) is likely to significantly influence the US approach to perpetual futures and may require separate guidance from the IRS on tax treatment.