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, warns CME Group Chairman and CEO Terry Duffy. In an interview, Duffy pointed out that there is ambiguity surrounding the tax implications for US participants. This ambiguity stems from the ongoing legal dispute between CME and the Commodity Futures Trading Commission (CFTC) regarding the regulator's approval of perpetual futures contracts in the US. The outcome of this case could substantially influence the US approach to perpetual futures, particularly in terms of how the Internal Revenue Service (IRS) will tax these contracts.
The core issue revolves around whether perpetual futures should be legally categorized as futures or swaps, with Duffy arguing that they should be considered swaps due to the periodic funding payments between long and short positions, which aligns with the statutory definition of a swap under US law. If perpetual contracts are deemed swaps, they would be subject to 'ordinary' taxation, unlike the blended tax treatment available for gains and losses under Section 1256 of the US tax code for futures.
Given the novelty of perpetual futures, the IRS has not provided specific guidance on their tax treatment, potentially leading to uncertainty for market participants who have been treating them as futures for tax purposes. Legal experts note that the issue is complex, with the textual structure of perpetual futures resembling swaps but functioning like futures, making it a 'substance-over-form' question. The broad definition of swaps and the recent Supreme Court decision to eliminate the Chevron doctrine, which reduces deference to agencies' interpretations of ambiguous statutes, add to the complexity and uncertainty.
This could result in a lengthy litigation process, with tax treatment potentially requiring separate IRS guidance. Until there is clarity from regulators, tax authorities, or the courts, large institutions may face uncertainty regarding the reporting of trades involving perpetual futures, highlighting the need for careful consideration and possibly consultation with the IRS to avoid potential tax disputes.