The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory risks if these products are ultimately deemed to be swaps rather than futures, warns CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy pointed out the ambiguity surrounding the tax implications for US participants due to the periodic funding payments exchanged between long and short positions in perpetual contracts. This dispute centers on whether perpetual futures should be legally classified as futures or swaps, with Duffy arguing that they should be considered swaps due to the recurring payment exchanges, which align with the statutory definition of a swap under US law.
If perpetual contracts are classified as futures, institutional traders may receive blended tax treatment under Section 1256 of the US tax code, but if they are deemed swaps, they will be taxed under 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 consider the issue complex, involving a substance-over-form question where the economic function of perpetual futures resembles that of futures, but their structure is more akin to swaps.
The definition of swaps is broad, leaving considerable room for interpretation, particularly with the Supreme Court's 2024 Loper Bright decision reducing federal courts' deference to agencies' interpretations of ambiguous statutes. This may lead to a lengthy and complex litigation process, with tax treatment potentially requiring separate guidance from the IRS, which may not necessarily align with the CFTC's interpretation.