The US approval of perpetual futures contracts may expose traders to unforeseen tax and regulatory uncertainty if these products are ultimately deemed swaps rather than futures, a concern that has received little attention, CME Group Chairman and CEO Terry Duffy warned in an interview. The ambiguity surrounding the tax treatment of perpetual futures stems from their unique characteristics, which differ from traditional futures contracts. Unlike traditional futures, perpetual contracts do not expire and instead involve periodic funding payments between long and short positions, a mechanism that satisfies the statutory definition of a swap under US law, according to Duffy.
If perpetual contracts are classified as swaps, they will be taxed under ordinary taxation, which could lead to uncertainty for market participants who have been treating them as futures for tax purposes. The IRS has not provided guidance on the tax treatment of perpetual futures, and the issue is further complicated by the broad definition of swaps, leaving room for interpretation. The outcome of the court battle between CME and the Commodity Futures Trading Commission (CFTC) over the regulator's approval of perpetual futures contracts in the US could significantly influence how the US approaches the rapidly growing arena of perpetual futures, with legal experts predicting a long and drawn-out process.