The approval of perpetual futures contracts in the US could lead to unforeseen tax and regulatory challenges for traders if these products are ultimately classified as swaps instead of futures, according to CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy noted that there is ambiguity surrounding the tax implications for US participants. The comments come as CME continues its legal challenge against the Commodity Futures Trading Commission (CFTC) over the regulator's approval of perpetual futures contracts in the US.
A federal court decision is pending, and the outcome could significantly influence how the US approaches the rapidly growing area of 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. Duffy argues that perpetual futures should be classified as swaps due to the periodic funding payments exchanged between long and short positions, which he believes satisfies the statutory definition of a swap under US law.
If perpetual contracts are deemed swaps, they would be subject to ordinary taxation, rather than the blended tax treatment available under Section 1256 of the US tax code for futures. 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 acknowledge the complexity of the issue, stating that while perpetual futures resemble swaps in structure, they function like futures, making it a substance-over-form question.
The definition of swaps is extremely broad, leaving room for interpretation regarding its application to new financial products like perpetual futures. The outcome will depend on the court's interpretation, and the process is likely to be lengthy, with potential litigation and separate guidance from the IRS required for tax treatment clarity.