The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty if these products are ultimately deemed swaps rather than futures, according to CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy emphasized the ambiguity surrounding the tax implications for US participants.
The comments come as CME continues to challenge the Commodity Futures Trading Commission's approval of perpetual futures contracts, with the outcome potentially influencing the US approach to this rapidly growing market. A key consequence of this dispute is how the Internal Revenue Service will tax these contracts, which hinges on whether perpetual futures are legally classified as futures or swaps.
Duffy argues that perpetual contracts should be considered swaps due to the periodic funding payments exchanged between long and short positions, which aligns with the statutory definition of a swap under US law. If perpetual contracts are deemed swaps, they will be subject to ordinary taxation, as opposed to the blended tax treatment available for futures under Section 1256 of the US tax code.
Given the lack of IRS guidance on the tax treatment of perpetual futures, market participants may face uncertainty in reporting these positions. Legal experts note that the issue is complex, with the statutory definition of swaps being broad and encompassing. The Supreme Court's decision to eliminate the Chevron doctrine may lead to judges playing a larger role in interpreting existing derivatives laws, potentially resulting in a lengthy and litigious process.
Ultimately, the tax treatment of perpetual futures may require separate guidance from the IRS, which may not necessarily adopt the CFTC's interpretation.