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 voiced by CME Group Chairman and CEO Terry Duffy. In an interview, Duffy emphasized 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 core issue revolves around whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing they 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 involve recurring funding payments to keep the derivative's price aligned with the underlying asset, a mechanism Duffy believes satisfies the statutory definition of a swap under US law. The mismatch in designation could lead to institutional traders receiving a blended tax treatment under Section 1256 of the US tax code if perpetual contracts are deemed futures, but they would be taxed under 'ordinary' taxation if classified as swaps. Given the novelty of perpetual futures, the IRS has not provided specific guidance on their tax treatment.
Legal experts, including Rustin Diehl and Jason Gottlieb, note that the issue is complex, with the definition of swaps being broad and the economic function of perpetual futures resembling that of traditional futures. The resolution of this issue may depend on court interpretation, particularly in light of the Supreme Court's 2024 Loper Bright decision, which reduced deference to agencies' interpretations of ambiguous statutes. This could lead to a lengthy litigation process, with tax treatment potentially requiring separate IRS guidance.
Until there is clarity from regulators, tax authorities, or the courts, large institutions may face uncertainty in reporting trades involving perpetual futures, posing significant risks.