The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty, as the classification of these contracts as either swaps or futures remains ambiguous, CME Group Chairman and CEO Terry Duffy warned. In an interview, Duffy emphasized that the tax perspective for all US participants is ambiguous due to the lack of clarity on this issue.
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. The outcome of this court decision could significantly influence how the US approaches the rapidly growing area of perpetual futures, particularly in terms of taxation by the Internal Revenue Service (IRS). The core dispute revolves around whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing that they should be considered swaps due to the periodic funding payments exchanged between long and short positions.
Unlike traditional futures, perpetual contracts do not expire and involve recurring funding payments to keep the derivative's price aligned with the underlying asset, a mechanism Duffy believes satisfies the statutory definition of a swap under US law. If perpetual contracts are deemed swaps, they would be taxed under 'ordinary' taxation, unlike the blended tax treatment available for futures under Section 1256 of the US tax code. Given the novelty of perpetual futures, the IRS has not provided specific guidance on their tax treatment, potentially leading to uncertainty for market participants who have been treating them as futures for tax purposes.
Legal experts, such as Rustin Diehl and Jason Gottlieb, underscore the complexity of the issue, 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 and the recent Supreme Court decision eliminating the Chevron doctrine, which reduces deference to agency interpretations of ambiguous statutes, further complicate the matter.
This could lead to extensive litigation, with courts potentially ignoring agency interpretations and making their own decisions on the classification and tax treatment of perpetual futures. Ultimately, clarity on the tax treatment of perpetual futures may require separate guidance from the IRS, which is not bound by the CFTC's interpretations.
Until then, large institutions face uncertainty in reporting trades involving perpetual futures, potentially leading to significant tax implications.