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. This ambiguity stems from the classification of perpetual futures as either swaps or futures, which could significantly influence their tax treatment. Unlike traditional futures, perpetual contracts do not expire and involve periodic funding payments between long and short positions.
Duffy argues that these recurring payments satisfy the statutory definition of a swap under US law, which could lead to taxation under 'ordinary' taxation rather than the blended tax treatment available for futures. However, the IRS has not issued 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 Supreme Court's 2024 Loper Bright decision potentially leading to a larger role for judges in interpreting derivatives laws.
The outcome of the court battle between CME and the CFTC will be crucial in determining the tax implications for perpetual futures, with potential litigation and separate guidance from the IRS required for clarity.