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, a concern that has received little attention, according to CME Group Chairman and CEO Terry Duffy. In an interview, 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 dispute centers on 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.
This classification could significantly influence how the US approaches the rapidly growing area of perpetual futures and impact the tax treatment of these contracts. If perpetual contracts are deemed swaps, they would be taxed under 'ordinary' taxation, unlike traditional futures, which receive blended tax treatment under Section 1256 of the US tax code. However, legal experts note that the issue is complex, with the definition of swaps being extremely broad and the economic function of perpetual futures resembling that of traditional futures. The outcome of the court decision could lead to uncertainty for market participants who have been treating perpetual futures as futures for tax purposes, and the IRS may not agree with the CFTC's definitions of financial instruments.
Until regulators, tax authorities, or the courts provide clarity, large institutions may face uncertainty over how to report trades involving perpetual futures.