The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory risks if these contracts are ultimately classified as swaps rather than futures, a concern that has received minimal attention, CME Group Chairman and CEO Terry Duffy warned. In an interview with CoinDesk, Duffy stated, 'There's a consequence that nobody's talking about... There's ambiguity right there, from a tax perspective, for all US participants now.' The comments come amid CME's ongoing legal challenge against the Commodity Futures Trading Commission (CFTC) over the regulator's approval of perpetual futures contracts in the US. The outcome of this court decision could significantly influence how the US approaches the rapidly growing market of perpetual futures, including how the Internal Revenue Service (IRS) taxes these contracts.

The dispute centers on whether perpetual futures should be legally treated as futures or swaps due to the periodic funding payments exchanged between long and short positions. Unlike traditional futures, perpetual contracts do not expire; instead, traders periodically exchange funding payments to keep the derivative's price close to the underlying asset's price. Duffy argued that these recurring payment exchanges satisfy the statutory definition of a swap under US law, stating, 'When two parties exchange payments to each other, that is deemed a swap.' He believes that the main problem with the current designation is that if perpetual contracts qualify as futures, many institutional traders could receive blended tax treatment under Section 1256 of the US tax code, where gains and losses are generally treated as 60% long-term and 40% short-term capital gains.

However, if these contracts are classified as swaps, they would be taxed under 'ordinary' taxation, and the IRS has not provided specific guidance on the tax treatment of perpetual futures. If regulators or courts ultimately conclude that perpetual contracts are swaps rather than futures, market participants who have been treating them as futures for tax purposes could face uncertainty about how to report these positions to the IRS. Legal experts agree that the issue is complex, with one expert stating, 'The challenge here is that textually, by the structure, perpetual futures look a lot like a swap, but economically they perform a lot like futures... It's really a substance-over-form question...

function versus text.' The definition of swaps is extremely broad, leaving considerable room for interpretation regarding its application to new financial products such as perpetual futures. The outcome will depend on how the court interprets the law, and it is likely to be a long, drawn-out process. Even if the litigation ultimately clarifies whether perpetual contracts are swaps or futures, tax treatment may still require separate guidance from the IRS.