CME's Duffy Highlights Overlooked Tax Risk Associated with US Perpetual Futures

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 with CoinDesk, Duffy pointed out that there is ambiguity from a tax perspective for all US participants due to the lack of clarity on the classification of perpetual futures. This ambiguity stems from the ongoing legal dispute between CME and the Commodity Futures Trading Commission (CFTC) regarding the regulator's approval of perpetual futures contracts. The outcome of this dispute could significantly influence the US approach to perpetual futures, including how the Internal Revenue Service (IRS) will tax these contracts.

At the heart of the dispute is 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 considered futures, many institutional traders could receive a blended tax treatment, with gains and losses treated as 60% long-term and 40% short-term capital gains. However, if these contracts are classified as swaps, they will be taxed under ordinary taxation. Given the novelty of perpetual futures, the IRS has not provided specific guidance on their tax treatment.

Legal experts note that the issue is complex, with the textual structure of perpetual futures resembling swaps but functioning economically like futures. The definition of swaps is extremely broad, leaving considerable room for interpretation regarding its application to new financial products like perpetual futures. The outcome will depend on how the court interprets the law, particularly in light of the Supreme Court's 2024 Loper Bright decision, which reduced the deference given to agencies' interpretations of ambiguous statutes.

This could lead to a lengthy litigation process, with tax treatment potentially requiring separate guidance from the IRS. Until there is greater clarity from regulators, tax authorities, or the courts, large institutions may face uncertainty over reporting trades involving perpetual futures, potentially leading to significant tax implications.