The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty, as the products' classification as either swaps or futures remains ambiguous, CME Group Chairman and CEO Terry Duffy warned in an interview. This ambiguity stems from the periodic funding payments exchanged between long and short positions in perpetual contracts, which Duffy argues aligns with the statutory definition of a swap under US law. If perpetual contracts are ultimately deemed swaps, they would be subject to 'ordinary' taxation, rather than the blended tax treatment available for futures under Section 1256 of the US tax code.
However, the IRS has not issued specific guidance on the tax treatment of perpetual futures, leaving market participants uncertain about how to report these positions. Legal experts emphasize 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 outcome of the ongoing legal challenge between CME and the Commodity Futures Trading Commission (CFTC) could significantly influence the US approach to perpetual futures, but the process is likely to be lengthy and may involve further litigation.