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 voiced by CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy pointed out the ambiguity surrounding the tax implications for US participants.
This ambiguity stems from the ongoing legal challenge by CME against the Commodity Futures Trading Commission (CFTC) regarding the regulator's approval of perpetual futures contracts. The outcome of this challenge could significantly influence how the US approaches perpetual futures and, notably, how the Internal Revenue Service (IRS) taxes these contracts. The core of the dispute lies in whether perpetual futures should be legally categorized 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 he believes satisfies the statutory definition of a swap under US law. Unlike traditional futures, perpetual contracts do not expire and involve periodic funding payments to keep the derivative's price aligned with the underlying asset.
Duffy's concern is that if perpetual contracts are deemed futures, many institutional traders might receive a blended tax treatment, but if they are classified as swaps, they will be taxed under 'ordinary' taxation, potentially leading to uncertainty for market participants who have been treating them as futures for tax purposes. Legal experts, however, view the issue as more complex, suggesting it's a 'substance over form' question, with the economic function of perpetual futures resembling that of futures, despite their structural similarity to swaps. The definition of swaps is broad, leaving room for interpretation, especially for new financial products like perpetual futures.
The resolution of this issue may depend on court interpretations, following the Supreme Court's 2024 Loper Bright decision, which reduced the deference given to agencies' interpretations of ambiguous statutes. This could lead to a lengthy litigation process, with experts predicting that a federal judge may first examine the CFTC's decision-making process before addressing the classification of perpetual contracts.
Even if litigation clarifies their status, tax treatment may still require separate IRS guidance, which may not align with the CFTC's interpretation. Until there is greater clarity from regulators, tax authorities, or the courts, large institutions may face uncertainty over reporting trades involving perpetual futures, potentially leading to significant tax implications.