The approval of perpetual futures contracts in the US may lead to unforeseen tax and regulatory uncertainty for traders if these products are ultimately deemed to be swaps rather than futures, a matter that has received little public attention, CME Group Chairman and CEO Terry Duffy warned in an interview. He pointed out that there is ambiguity from a tax perspective for all US participants due to the lack of clear classification of perpetual futures as either swaps or futures.
The comments come as CME continues its 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 challenge could significantly influence how the US approaches the rapidly growing area of perpetual futures, particularly in terms of how the Internal Revenue Service (IRS) taxes these contracts.
At the heart of the dispute is whether perpetual futures should be legally treated 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, which aligns with the statutory definition of a swap under US law. If perpetual contracts are classified as swaps, they would be taxed under ordinary taxation, as opposed to the blended tax treatment available under Section 1256 of the US tax code for futures, which could lead to uncertainty for market participants who have been treating them as futures for tax purposes.
Legal experts, however, 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, making it a substance-over-form question. The Supreme Court's 2024 Loper Bright decision, which eliminated the Chevron doctrine, may also play a role in how federal courts interpret the application of derivatives laws to novel financial products like perpetual futures, potentially leading to a long and drawn-out process of litigation and clarification. Ultimately, the tax treatment of perpetual futures may require separate guidance from the IRS, which is not obligated to adopt the CFTC's interpretation, leaving large institutions facing uncertainty over how to report trades involving these contracts.