The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory risks 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 emphasized that there is ambiguity surrounding the tax implications for US participants due to the periodic funding payments exchanged between long and short positions in perpetual contracts. This ambiguity stems from the dispute over whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing that they should be considered swaps due to the recurring payment exchanges, which satisfy the statutory definition of a swap under US law.
If perpetual contracts are deemed swaps, they would be subject to ordinary taxation, rather than the blended tax treatment available under Section 1256 of the US tax code for futures. This could lead to uncertainty for market participants who have been treating perpetual futures as futures for tax purposes, potentially resulting in incorrect tax filings and unforeseen tax liabilities.
Independent legal experts agree 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. The outcome of the ongoing legal challenge between CME and the Commodity Futures Trading Commission (CFTC) is eagerly awaited, as it may significantly influence how the US approaches the rapidly growing market of perpetual futures and provide clarity on their tax treatment.