The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty if these products are ultimately classified as swaps rather than futures, a concern that has received little attention, according to CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy stated, 'There's a consequence that nobody's talking about. There's ambiguity right there, from a tax perspective, for all US participants now.' 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 the US approach to the rapidly growing arena of perpetual futures, including how the Internal Revenue Service (IRS) taxes these contracts. The dispute centers on whether perpetual futures should be legally treated as futures or swaps.
Duffy argues that perpetual futures, which involve periodic funding payments between long and short positions, should be classified as swaps under US law. Unlike traditional futures, perpetual contracts do not expire and instead involve traders exchanging funding payments to keep the derivative's price close to that of the underlying asset.
If perpetual contracts are deemed swaps, they would be taxed under 'ordinary' taxation, rather than the blended tax treatment available under Section 1256 of the US tax code for futures. However, the IRS has not provided guidance on the tax treatment of perpetual futures, and the classification of these contracts as swaps or futures could lead to uncertainty for market participants. Legal experts note that the issue is complex, with the definition of swaps being extremely broad and the economic function of perpetual futures differing from their textual structure.
The outcome of the court decision will depend on the interpretation of the statute, and it may lead to a long and drawn-out process. Ultimately, tax treatment may require separate guidance from the IRS, which is not obligated to adopt the CFTC's interpretation of financial instruments.