The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty if these products are ultimately deemed to be swaps rather than futures, a concern highlighted by 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 the legal definition of these contracts.
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 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, including how the Internal Revenue Service (IRS) will tax these contracts. The core issue revolves around whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing that they should be classified as swaps due to the periodic funding payments exchanged between long and short positions, which aligns with the statutory definition of a swap under US law.
This distinction is crucial because if perpetual contracts are classified as futures, many institutional traders may receive a blended tax treatment, whereas if they are deemed swaps, they will be subject to ordinary taxation. 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 note that the issue is complex, with the textual structure of perpetual futures resembling swaps but performing economically like futures, creating a substance-over-form question. The definition of swaps is broad, leaving considerable room for interpretation, especially regarding new financial products like perpetual futures. The outcome will depend on the court's interpretation, and given the Supreme Court's 2024 Loper Bright decision, which reduced the deference given to agencies' interpretations of ambiguous statutes, judges may play a significant role in deciding how existing derivatives laws apply to novel crypto products.
This could lead to a lengthy litigation process, with potential tax implications that may require separate guidance from the IRS, which is not obligated to adopt the CFTC's interpretation of financial instruments.