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, 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 amid CME's ongoing legal challenge against the Commodity Futures Trading Commission (CFTC) over the regulator's approval of perpetual futures contracts in the US. A federal court decision is pending, and its outcome could significantly influence how the US approaches the rapidly growing arena of perpetual futures, particularly regarding taxation by the Internal Revenue Service (IRS).
The dispute centers on whether perpetual futures should be legally treated as futures or swaps due to the periodic funding payments exchanged between long and short positions. Unlike traditional futures, perpetual contracts do not expire; instead, traders periodically exchange funding payments to keep the derivative's price close to the underlying asset's price.
Duffy argued that these recurring payment exchanges satisfy the statutory definition of a swap under US law. 'When two parties exchange payments to each other, that is deemed a swap,' he said, referencing the funding-rate mechanism used by perpetual contracts. The main issue with this designation mismatch is that if perpetual contracts qualify as futures, many institutional traders could receive blended tax treatment under Section 1256 of the US tax code, where gains and losses are generally treated as 60% long-term and 40% short-term capital gains. However, if these contracts are classified as swaps, they will be taxed under 'ordinary' taxation.
Given that perpetual futures are newer innovations, the IRS has not issued specific guidance on their tax treatment. If regulators or courts ultimately conclude that perpetual contracts are swaps rather than futures, market participants who have been treating them as futures for tax purposes could face uncertainty about how to report these positions to the IRS. Legal experts say the issue is complex, with the textual structure of perpetual futures resembling swaps but performing economically like futures, making it a 'substance-over-form question … function versus text.' The definition of swaps is extremely broad, leaving considerable room for interpretation regarding its application to new financial products like perpetual futures.
The outcome will depend on how the court interprets the law, particularly after the Supreme Court's 2024 Loper Bright decision, which reduced federal courts' deference to agencies' interpretations of ambiguous statutes. This could lead to a long, drawn-out process with potential litigation and a need for separate guidance from the IRS, which may not adopt the CFTC's interpretation of financial instruments. Until there is greater clarity from regulators, tax authorities, or the courts, Duffy warns that large institutions could face uncertainty over reporting trades involving perpetual futures, potentially leading to tax issues.