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, Duffy emphasized the ambiguity surrounding the tax implications for US participants. This issue has received little attention, despite its potential impact on the rapidly growing market of perpetual futures.
The classification of perpetual futures as swaps or futures is currently being disputed in a court battle between CME and the Commodity Futures Trading Commission (CFTC). The outcome of this case could significantly influence how the US approaches perpetual futures and their tax treatment.
Duffy argues that perpetual contracts should be considered swaps due to the periodic funding payments exchanged between long and short positions, which he believes satisfies the statutory definition of a swap under US law. If perpetual contracts are classified as futures, many institutional traders may receive a blended tax treatment, with gains and losses treated as 60% long-term and 40% short-term capital gains.
However, if they are classified as swaps, they will be taxed under ordinary taxation. The IRS has not provided 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 open to interpretation. The Supreme Court's decision to eliminate the Chevron doctrine may lead to federal courts playing a larger role in deciding how existing derivatives laws apply to novel financial products like perpetual futures.
The resolution of this issue is likely to be a long and drawn-out process, with potential litigation and the need for separate guidance from the IRS.