The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty, as the products' classification as swaps or futures remains ambiguous, CME Group Chairman and CEO Terry Duffy warned in an interview. This ambiguity stems from the periodic funding payments exchanged between long and short positions in perpetual contracts, which Duffy believes should be considered swaps under US law.
If perpetual contracts are deemed swaps, they would be subject to 'ordinary' taxation, as opposed to the blended tax treatment available for futures under Section 1256 of the US tax code. However, the IRS has not provided guidance on the tax treatment of perpetual futures, leaving market participants uncertain about how to report these positions. Legal experts argue that the issue is complex, with the definition of swaps being extremely broad and the distinction between substance and form being crucial. The outcome of the ongoing court battle between CME and the CFTC will significantly influence the tax treatment of perpetual futures, but the process is likely to be lengthy and may involve further litigation.