The approval of perpetual futures contracts in the US may lead to unforeseen tax and regulatory challenges for traders 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 with CoinDesk, Duffy noted that there is ambiguity surrounding the tax implications for US participants. The comments come as CME continues to challenge the Commodity Futures Trading Commission's (CFTC) approval of perpetual futures contracts in the US, with the outcome of the federal court decision potentially influencing the US approach to perpetual futures. A key consequence of this dispute is how the Internal Revenue Service (IRS) will tax these contracts.
The issue at hand is 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. Unlike traditional futures, perpetual contracts do not expire and instead involve periodic funding payments to keep the derivative's price close to the underlying asset.
Duffy believes that these recurring payment exchanges meet the statutory definition of a swap under US law. If perpetual contracts are classified as futures, many institutional traders may receive a blended tax treatment, with gains and losses treated as 60% long-term and 40% short-term capital gains. However, if they are classified as swaps, they will be taxed under 'ordinary' taxation. The IRS has not provided guidance on the tax treatment of perpetual futures, leaving market participants uncertain about how to report these positions.
Legal experts agree that the issue is complex, with the definition of swaps being extremely broad and the economic function of perpetual futures differing from their textual structure. The Supreme Court's 2024 Loper Bright decision has eliminated the Chevron doctrine, allowing federal courts to give less deference to agencies' interpretations of ambiguous statutes. As a result, judges may play a larger role in deciding how existing derivatives laws apply to novel crypto products. The process is likely to be long and drawn out, with potential litigation and the need for separate guidance from the IRS.