The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory risks if these contracts are ultimately deemed swaps rather than futures, a matter that has received minimal attention, CME Group Chairman and CEO Terry Duffy warned. In an interview with CoinDesk, Duffy stated, 'There's a consequence that nobody's talking about.
There's ambiguity right there, from a tax perspective, for all US participants now.' The comments come amidst CME's ongoing legal dispute with the Commodity Futures Trading Commission (CFTC) regarding the regulator's approval of perpetual futures contracts in the US. The outcome of this case could substantially influence the US approach to the rapidly growing market of perpetual futures. One key consequence, according to Duffy, involves how the Internal Revenue Service (IRS) will tax these contracts.
The dispute centers on whether perpetual futures should be legally categorized as futures or swaps. Duffy argued that perpetual contracts, which involve periodic funding payments between long and short positions, should be considered swaps under US law due to these recurring payment exchanges. Unlike traditional futures, perpetual contracts do not expire; instead, traders periodically exchange funding payments to keep the derivative's price aligned with the underlying asset. Duffy emphasized that if perpetual contracts are classified as futures, many institutional traders may receive a blended tax treatment under Section 1256 of the US tax code, where gains and losses are generally treated as 60% long-term and 40% short-term capital gains.
However, if these contracts are deemed swaps, they will be taxed under 'ordinary' taxation. Given the novelty of perpetual futures, the IRS has not provided specific guidance on their tax treatment. If regulators or courts ultimately conclude that perpetual contracts are swaps rather than futures, market participants who have been treating them as futures for tax purposes may face uncertainty about how to report these positions to the IRS. Legal experts note that the issue is complex, with the textual structure of perpetual futures resembling swaps but functioning economically like futures.
The definition of swaps is extremely broad, leaving considerable room for interpretation regarding its application to new financial products like perpetual futures. The outcome will depend on the court's interpretation, particularly in light of the Supreme Court's 2024 Loper Bright decision, which reduced federal courts' deference to agencies' interpretations of ambiguous statutes. This could lead to a lengthy and litigious process, with tax treatment potentially requiring separate guidance from the IRS.