The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory ambiguities if these products are ultimately deemed swaps rather than futures, CME Group Chairman and CEO Terry Duffy warned. In an interview with CoinDesk, Duffy pointed out that there's a lack of clarity regarding the tax implications for US participants due to the ambiguous nature of perpetual futures. The comments come as CME continues its legal challenge against the Commodity Futures Trading Commission (CFTC) regarding the regulator's approval of perpetual futures contracts.
The core issue revolves around whether perpetual futures should be legally categorized as futures or swaps, a distinction that significantly influences their tax treatment. Duffy argues that perpetual futures should be considered swaps due to the periodic funding payments exchanged between long and short positions, satisfying the statutory definition of a swap under US law. However, 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. Conversely, if they are deemed swaps, they will be subject to 'ordinary' taxation.
The IRS has not provided specific guidance on the tax treatment of perpetual futures, adding to the uncertainty. Legal experts note that the issue is complex, with the textual structure of perpetual futures resembling swaps but functioning economically like futures, posing a 'substance-over-form' question.
The definition of swaps is extremely broad, leaving considerable room for interpretation, especially concerning novel financial products like perpetual futures. The outcome of the court decision could have a significant impact on how the US approaches perpetual futures, with the potential for extensive litigation and the need for separate guidance from the IRS. Until there is greater clarity from regulators, tax authorities, or the courts, large institutions may face uncertainty regarding the reporting of trades involving perpetual futures.