The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty if these products are ultimately classified as swaps rather than futures, CME Group Chairman and CEO Terry Duffy warned. In an interview with CoinDesk, Duffy highlighted the ambiguity surrounding the tax implications for US participants.
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. The outcome of this court decision could significantly influence the US approach to perpetual futures, including how the Internal Revenue Service (IRS) taxes these contracts. The dispute centers on whether perpetual futures should be legally treated as futures or swaps.
Duffy argues that perpetual futures, which involve periodic funding payments between long and short positions, should be considered swaps under US law. 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. This funding mechanism, Duffy contends, satisfies the statutory definition of a swap.
The main concern with the current designation of perpetual futures as futures is that it could lead to a blended tax treatment under Section 1256 of the US tax code, where gains and losses are treated as 60% long-term and 40% short-term capital gains. If perpetual contracts are classified as swaps, they would be subject to ordinary taxation. However, the IRS has not provided specific guidance on the tax treatment of perpetual futures. Legal experts note that the issue is complex, with the textual structure of perpetual futures resembling swaps but their economic function similar to futures.
The definition of swaps is broad, leaving room for interpretation regarding its application to new financial products like perpetual futures. The Supreme Court's 2024 Loper Bright decision, which eliminated the Chevron doctrine, means federal courts will give less deference to agencies' interpretations of ambiguous statutes, potentially leading to a larger role for judges in deciding how derivatives laws apply to novel crypto products. The process of resolving this issue is likely to be lengthy, with litigation expected and the possibility that a federal judge may first examine whether the CFTC reasonably considered public comments before approving these contracts.
Even if the litigation clarifies the classification of perpetual contracts, tax treatment may still require separate guidance from the IRS, which is not obligated to adopt 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, potentially leading to significant tax implications.