The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty if these products are ultimately deemed to be 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 all US participants due to the lack of clarity on whether perpetual futures should be legally treated as swaps or futures.
This ambiguity stems from the periodic funding payments exchanged between long and short positions in perpetual contracts, which Duffy argues aligns with the statutory definition of a swap under US law. The main issue with the current designation is that if perpetual contracts are considered futures, many institutional traders may receive a blended tax treatment, whereas if they are classified as swaps, they will be taxed under ordinary taxation. However, the IRS has not provided specific guidance on the tax treatment of perpetual futures, potentially leading to uncertainty for market participants if the regulators or courts ultimately conclude that these contracts are swaps rather than futures. Legal experts note that the issue is complex, with the textual structure of perpetual futures resembling swaps but performing economically like futures, making it a substance-over-form question.
The definition of swaps is broad, leaving room for interpretation, especially with 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 litigation process, with the outcome significantly influencing the tax treatment of perpetual futures and potentially requiring separate guidance from the IRS.