The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty if these contracts are ultimately deemed swaps rather than futures, a concern raised by CME Group Chairman and CEO Terry Duffy. In an interview, Duffy pointed out the ambiguity surrounding the tax perspective for US participants. The comments come amidst CME's ongoing legal challenge against the Commodity Futures Trading Commission (CFTC) regarding the regulator's approval of perpetual futures contracts.
The outcome of this challenge could significantly impact how the US approaches perpetual futures, including how the Internal Revenue Service (IRS) taxes these contracts. The dispute centers on whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing they should be considered swaps due to the periodic funding payments exchanged between long and short positions, which satisfies the statutory definition of a swap under US law.
If perpetual contracts are classified as futures, institutional traders may receive a blended tax treatment, but if they are considered 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 note that the issue is complex, with the definition of swaps being extremely broad and the challenge being a 'substance-over-form' question. The Supreme Court's 2024 Loper Bright decision has also eliminated the Chevron doctrine, giving federal courts less deference to agencies' interpretations of ambiguous statutes.
As a result, the court's interpretation will be crucial, and the process is likely to be long and drawn out, with potential litigation and the need for separate guidance from the IRS.