The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory risks if these contracts are ultimately deemed swaps rather than futures, a concern that has garnered little attention, CME Group Chairman and CEO Terry Duffy warned. In an interview with CoinDesk, Duffy stated, 'There's an ambiguity from a tax perspective for all US participants now.' His comments come as CME continues to challenge the Commodity Futures Trading Commission (CFTC) in court over the regulator's approval of perpetual futures contracts. The outcome of this case could substantially influence the US approach to the rapidly growing market of perpetual futures, including how the Internal Revenue Service (IRS) taxes these contracts.
The dispute revolves around whether perpetual futures should be legally categorized as futures or 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 aligned with the underlying asset. Duffy argued that these recurring payment exchanges meet the statutory definition of a swap under US law.
He expressed concern that if perpetual contracts are classified as futures, many institutional traders could receive a blended tax treatment, but if they are deemed swaps, they would be taxed under 'ordinary' taxation. Given the novelty of perpetual futures, the IRS has not provided specific guidance on their tax treatment.
If regulators or courts ultimately conclude that perpetual contracts are swaps, market participants who have treated them as futures for tax purposes could face uncertainty about how to report these positions to the IRS. Legal experts, however, view the issue as more complex, stating that while perpetual futures structurally resemble swaps, they function economically like futures, posing a 'substance-over-form' question. The definition of swaps is extremely broad, leaving room for interpretation regarding its application to new financial products like perpetual futures. The outcome will depend on the court's interpretation, and the process is likely to be lengthy and involve considerable litigation.
Ultimately, the tax treatment may still require separate guidance from the IRS, which may not adopt the CFTC's interpretation, potentially leaving large institutions with uncertainty over reporting trades involving perpetual futures.