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 pointed out the ambiguity surrounding the tax perspective for all US participants due to the lack of clarity on whether perpetual futures should be treated as swaps or futures. This ambiguity stems from the periodic funding payments exchanged between long and short positions in perpetual contracts, which Duffy argues aligns more closely with the definition of swaps under US law.
The main issue with this classification mismatch is the potential tax treatment, as gains and losses from futures are generally treated as 60% long-term and 40% short-term capital gains, whereas swaps are taxed under 'ordinary' taxation. However, the IRS has not provided specific guidance on the tax treatment of perpetual futures, leaving market participants uncertain about how to report these positions.
Legal experts note that the issue is complex, with the definition of swaps being extremely broad and the economic performance of perpetual futures resembling that of traditional futures. The outcome of the court battle between CME and the CFTC over the approval of perpetual futures contracts will significantly influence how the US approaches these products and their tax treatment.
The process is likely to be lengthy, with potential litigation and the need for the IRS to provide separate guidance on tax treatment, leaving large institutions facing uncertainty over reporting trades involving perpetual futures.