The approval of perpetual futures contracts in the US may lead to unforeseen tax and regulatory uncertainty for traders if these products are ultimately deemed to be swaps rather than futures, a concern raised by CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy noted that there is ambiguity surrounding the tax implications for US participants due to the lack of clarity on the classification of perpetual futures. This ambiguity stems from the ongoing legal dispute between CME and the Commodity Futures Trading Commission (CFTC) regarding the regulator's approval of perpetual futures contracts.
The outcome of this dispute could substantially influence the US approach to the rapidly growing market of perpetual futures, particularly in terms of 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 considered 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.
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. However, if they are deemed swaps, they will be taxed under ordinary taxation, leading to potential uncertainty for market participants who have been treating them as futures for tax purposes. Legal experts emphasize that the issue is complex, with the definition of swaps being extremely broad and the economic function of perpetual futures resembling that of traditional futures. The Supreme Court's decision to eliminate the Chevron doctrine may lead to federal courts playing a larger role in interpreting derivatives laws, potentially resulting in a lengthy and complex process to resolve the classification and tax treatment of perpetual futures.