The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory risks if these contracts are ultimately classified as swaps rather than futures, CME Group Chairman and CEO Terry Duffy warned. This issue, which has received little attention, stems from the ambiguity surrounding the tax implications of perpetual futures. In an interview with CoinDesk, Duffy emphasized that there is a lack of clarity regarding the tax treatment of these contracts, which could lead to unexpected consequences for US participants. The dispute centers on whether perpetual futures should be legally considered swaps or futures, with Duffy arguing that they should be classified as swaps due to the periodic funding payments exchanged between long and short positions.
Unlike traditional futures, perpetual contracts do not expire and instead involve periodic funding payments to maintain the derivative's price close to the underlying asset. Duffy believes that these recurring payments meet the statutory definition of a swap under US law.
The main concern with this mismatched designation is that if perpetual contracts are deemed futures, many institutional traders may be eligible for blended tax treatment under Section 1256 of the US tax code, which treats gains and losses as 60% long-term and 40% short-term capital gains. However, if these contracts are classified as swaps, they will be subject to ordinary taxation. Given the novelty of perpetual futures, the IRS has not provided specific guidance on their tax treatment. If regulators or courts ultimately determine that perpetual contracts are swaps rather than futures, market participants who have been treating them as futures for tax purposes may face uncertainty when reporting their positions to the IRS.
Legal experts acknowledge that the issue is complex, with the definition of swaps being extremely broad and leaving room for interpretation. The outcome of the court case will significantly influence how the US approaches perpetual futures, and the process is likely to be lengthy and involve considerable litigation. Ultimately, tax treatment may require separate guidance from the IRS, which may not adopt the CFTC's interpretation of financial instruments.