The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty, as the classification of these products as swaps or futures remains ambiguous, according to CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy stated, 'There's a consequence that nobody's talking about. There's ambiguity right there, from a tax perspective, for all US participants now.' 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 in the US. The outcome of the court decision could significantly influence how the US approaches the rapidly growing arena of perpetual futures, particularly in regards to tax implications.
The dispute centers on whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing that they should be classified as swaps due to the periodic funding payments exchanged between long and short positions. Unlike traditional futures, perpetual contracts never expire and instead involve periodic funding payments to keep the derivative's price close to that of the underlying asset.
Duffy believes that these recurring payment exchanges satisfy the statutory definition of a swap under US law. The main issue with the current designation is that if perpetual contracts qualify as 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, which could lead to uncertainty for market participants who have been treating them as futures for tax purposes.
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 Supreme Court's 2024 Loper Bright decision has also eliminated the Chevron doctrine, allowing federal courts to play a larger role in interpreting ambiguous statutes and deciding how existing derivatives laws apply to novel crypto products. As a result, the classification of perpetual futures and their tax implications may be subject to lengthy litigation and potentially contradictory guidance from regulatory agencies.