The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory risks if these products are ultimately classified as swaps rather than futures, according to CME Group Chairman and CEO Terry Duffy. This ambiguity has received little attention, despite its potential consequences.
The issue stems from the legal definition of swaps and futures, with Duffy arguing that perpetual futures 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 instead involve recurring funding payments to keep the derivative's price close to the underlying asset. If perpetual contracts are deemed swaps, they will be taxed under ordinary taxation, rather than the blended tax treatment available for futures under Section 1256 of the US tax code. However, the IRS has not provided guidance on the tax treatment of perpetual futures, leaving market participants uncertain about how to report these positions.
Legal experts consider the issue complex, with the definition of swaps being broad and open to interpretation. The outcome of the court battle between CME and the CFTC will significantly influence the US approach to perpetual futures, and the tax implications may require separate guidance from the IRS.