The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory risks if these contracts are ultimately deemed to be swaps rather than futures, warned CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy pointed out the ambiguity surrounding the tax implications for US participants. The comments come as CME continues to challenge the Commodity Futures Trading Commission (CFTC) over its approval of perpetual futures contracts, with the outcome potentially influencing the US approach to these rapidly growing financial products. A key consideration is how the Internal Revenue Service (IRS) will tax these contracts.
The dispute centers on whether perpetual futures should be legally classified as futures or swaps due to the periodic funding payments exchanged between long and short positions. Duffy argued that these recurring payments align with 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 lack of IRS guidance on the tax treatment of perpetual futures, market participants may face uncertainty in reporting these positions.
Legal experts note that the issue is complex, with the textual structure of perpetual futures resembling swaps but functioning economically like futures, making it a 'substance over form' question. The broad definition of swaps and the recent elimination of the Chevron doctrine, which reduces deference to agency interpretations, add to the uncertainty. The court's interpretation will be crucial, and the process is likely to be lengthy, with potential litigation and the need for separate IRS guidance on tax treatment.