The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty, according to CME Group Chairman and CEO Terry Duffy, due to the ambiguity surrounding their classification as either 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.
If perpetual contracts are ultimately deemed swaps, they would be taxed under ordinary taxation, rather than the blended tax treatment available for futures under Section 1256 of the US tax code. However, the IRS has not provided specific guidance on the tax treatment of perpetual futures, leaving market participants uncertain about how to report these positions. Legal experts consider the issue complex, with the definition of swaps being extremely broad, and the outcome may depend on how the court interprets the statute, potentially leading to a lengthy and drawn-out process.