The approval of perpetual futures contracts in the US may lead to unforeseen tax and regulatory uncertainty for traders if these products are ultimately deemed to be swaps rather than futures, warns CME Group Chairman and CEO Terry Duffy. In an interview, Duffy pointed out the ambiguity surrounding the tax perspective for all US participants, emphasizing a consequence that has not been widely discussed.
This concern arises as CME continues its legal challenge against the Commodity Futures Trading Commission (CFTC) regarding the regulator's approval of perpetual futures contracts. The outcome of this challenge could substantially influence the US approach to the rapidly growing area of perpetual futures, including how the Internal Revenue Service (IRS) will tax these contracts. The core of the dispute lies in whether perpetual futures should be legally categorized 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 aligns with the statutory definition of a swap under US law.
If perpetual contracts are classified as futures, many institutional traders might receive a blended tax treatment, but if they are deemed swaps, they would be taxed under ordinary taxation, potentially leading to uncertainty for market participants who have been treating them as futures for tax purposes. Legal experts, however, view the issue as more complex, highlighting that while perpetual futures structurally resemble swaps, they function economically like futures, making it a substance-over-form question. The broad definition of swaps adds to the uncertainty, leaving considerable room for interpretation, especially with the Supreme Court's decision to give less deference to agencies' interpretations of ambiguous statutes.
This could lead to a lengthy litigation process, with tax treatment potentially requiring separate guidance from the IRS, which may not align with the CFTC's interpretation. Until there is greater clarity from regulators, tax authorities, or the courts, large institutions may face uncertainty over reporting trades involving perpetual futures, posing significant risks.