The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty, according to CME Group Chairman and CEO Terry Duffy, due to the ambiguity surrounding their classification as swaps or futures. This issue has garnered little public attention, despite its potential consequences.
Duffy's comments come as CME continues to challenge the Commodity Futures Trading Commission's (CFTC) approval of these contracts, with the outcome potentially influencing the US approach to perpetual futures. A key concern is how the Internal Revenue Service (IRS) will tax these contracts, given the periodic funding payments exchanged between long and short positions, which Duffy argues satisfies the statutory definition of a swap under US law. If perpetual contracts are deemed swaps, they will be taxed under ordinary taxation, rather than the blended tax treatment available for futures under Section 1256 of the US tax code.
However, legal experts note 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 2024 Loper Bright decision has also shifted the interpretation of ambiguous statutes, giving federal courts less deference to agencies' interpretations. As a result, the classification and tax treatment of perpetual futures may be subject to lengthy litigation, potentially leading to uncertainty for market participants and institutions.