The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty if these products are ultimately classified as swaps rather than futures, 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 treated as swaps or futures.
This ambiguity stems from the periodic funding payments exchanged between long and short positions in perpetual contracts, which Duffy believes satisfies the statutory definition of a swap under US law. The main concern with this mismatched designation is that if perpetual contracts qualify as futures, many institutional traders could receive the blended tax treatment available under Section 1256 of the US tax code, but if they fall under swaps, they will be taxed under 'ordinary' taxation. However, the IRS has not issued guidance specifically addressing the tax treatment of perpetual futures. Legal experts note that the issue is complex, with the definition of swaps being extremely broad, leaving considerable room for interpretation regarding its application to new financial products such as perpetual futures.
The outcome of the court decision could significantly influence how the US approaches the rapidly growing arena of perpetual futures, and it may ultimately come down to how the court interprets the existing derivatives laws. The process is likely to be long and drawn out, with potential litigation and the need for separate guidance from the IRS.