The approval of perpetual futures contracts in the US could lead to unforeseen tax and regulatory issues for traders if these products are ultimately classified as swaps rather than futures, according to CME Group Chairman and CEO Terry Duffy. In an interview, Duffy noted 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. The Commodity Futures Trading Commission's (CFTC) approval of perpetual futures contracts is currently being challenged by CME in a federal court, with the outcome potentially influencing how the US approaches the growing market of perpetual futures.
A key consideration is how the Internal Revenue Service (IRS) will tax these contracts, with Duffy arguing that perpetual futures should be legally treated as swaps due to the periodic funding payments exchanged between long and short positions. Unlike traditional futures, perpetual contracts do not expire and instead involve periodic funding payments to keep the derivative's price close to the underlying asset. Duffy believes that these recurring payment exchanges meet the statutory definition of a swap under US law.
If perpetual contracts are classified as futures, institutional traders may receive blended tax treatment, but if they are classified as swaps, they will be taxed under ordinary taxation. However, the IRS has not provided guidance on the tax treatment of perpetual futures, creating uncertainty for market participants. Legal experts consider the issue complex, with the definition of swaps being broad and the economic function of perpetual futures differing from their textual structure. The Supreme Court's 2024 Loper Bright decision has also impacted the interpretation of ambiguous statutes, giving federal courts more authority to decide how existing derivatives laws apply to novel products like perpetual futures.
The classification of perpetual futures as swaps or futures may ultimately be decided by the courts, with tax treatment potentially requiring separate guidance from the IRS.