The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty, as the classification of these contracts as swaps or futures remains ambiguous, according to CME Group Chairman and CEO Terry Duffy. In an interview, Duffy noted that 'there's a consequence that nobody's talking about' regarding the tax implications of these contracts. The comments come as CME continues its legal challenge against the Commodity Futures Trading Commission (CFTC) over the regulator's approval of perpetual futures contracts. The dispute centers on whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing that the periodic funding payments exchanged between long and short positions satisfy the statutory definition of a swap under US law.
If perpetual contracts are ultimately classified as swaps, they will be taxed under 'ordinary' taxation, which could lead to uncertainty for market participants who have been treating them as futures for tax purposes. Legal experts agree that the issue is complex, with one noting that 'the challenge here is that textually, by the structure, perpetual futures look a lot like a swap, but economically they perform a lot like futures.' The definition of swaps is extremely broad, leaving considerable room for interpretation, and the Supreme Court's 2024 Loper Bright decision has eliminated the longstanding Chevron doctrine, giving federal courts less deference to agencies' interpretations of ambiguous statutes. As a result, the court's interpretation will be crucial in determining the tax implications of perpetual futures, and the process is likely to be long and drawn out, with potential litigation and separate guidance from the IRS required to clarify the tax treatment of these contracts.