CME's Duffy Highlights Overlooked Tax Risk in US Perpetual Futures

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, a concern raised by CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy pointed out the ambiguity surrounding the tax perspective for all US participants. This comes as CME continues its legal challenge against the Commodity Futures Trading Commission (CFTC) over the regulator's approval of perpetual futures contracts in the US. The outcome of this challenge could significantly influence the US approach to the rapidly growing area of perpetual futures, including how the Internal Revenue Service (IRS) taxes these contracts.

The dispute centers on whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing they should be considered swaps due to the periodic funding payments exchanged between long and short positions, satisfying the statutory definition of a swap under US law. If perpetual contracts are deemed swaps, they would be taxed under 'ordinary' taxation, unlike the blended tax treatment available for futures under Section 1256 of the US tax code. Given the novelty of perpetual futures, the IRS has not issued specific guidance on their tax treatment, potentially leading to uncertainty for market participants if the contracts are ultimately classified as swaps. Legal experts note that the issue is complex, with the textual structure of perpetual futures resembling swaps but functioning economically like futures, making it a 'substance-over-form' question.

The broad definition of swaps and the elimination of the Chevron doctrine by the Supreme Court's 2024 Loper Bright decision could lead to considerable room for interpretation and potential litigation. The process of clarifying the classification and tax treatment of perpetual futures is expected to be lengthy, with experts suggesting that tax guidance from the IRS may be necessary regardless of the outcome of the CFTC's and CME's legal dispute.