The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty if these products are ultimately deemed to be swaps rather than futures, a concern that has received little public attention, according to CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy pointed out 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 ambiguity stems from the periodic funding payments exchanged between long and short positions in perpetual contracts, which Duffy argues satisfy the statutory definition of a swap under US law.
If perpetual contracts are classified as swaps, they will be taxed under ordinary taxation, as opposed to the blended tax treatment available under Section 1256 of the US tax code for futures. However, the IRS has not provided guidance on the tax treatment of perpetual futures, leaving market participants uncertain about how to report these positions. 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 ongoing legal challenge by CME against the Commodity Futures Trading Commission (CFTC) over the regulator's approval of perpetual futures contracts in the US could significantly influence how the US approaches the growing arena of perpetual futures and may lead to further litigation on the tax treatment of these contracts.