The US approval of perpetual futures contracts may expose traders to unforeseen tax and regulatory risks if these products are ultimately deemed swaps rather than futures, according to CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy pointed out that there is ambiguity from a tax perspective for all US participants due to the lack of clarity on whether perpetual futures should be treated as swaps or futures.
The issue stems from the periodic funding payments exchanged between long and short positions in perpetual contracts, which Duffy argues should fall under the legal definition of swaps. Unlike traditional futures, perpetual contracts do not expire and instead involve recurring funding payments to keep the derivative's price close to the underlying asset. This mechanism satisfies the statutory definition of a swap under US law, according to Duffy. If perpetual contracts are classified as swaps, they will be taxed under ordinary taxation, rather than the blended tax treatment available for futures under Section 1256 of the US tax code.
However, the IRS has not provided specific 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 economic function of perpetual futures resembling that of traditional futures.
The outcome of the court battle between CME and the CFTC will significantly influence the tax treatment of perpetual futures, and the Supreme Court's 2024 Loper Bright decision may lead to a more significant role for judges in interpreting derivatives laws. The lack of clarity may result in litigation and uncertainty for large institutions trading perpetual futures, highlighting the need for regulatory and tax authorities to provide greater clarity on the classification and tax treatment of these products.