The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty if these products are ultimately deemed to be swaps rather than futures, a concern highlighted by CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy noted that there is ambiguity from a tax perspective for all US participants due to the lack of clarity on this issue. This concern arises as CME continues its legal challenge against the Commodity Futures Trading Commission (CFTC) regarding the regulator's approval of perpetual futures contracts in the US. The outcome of this case could substantially influence how the US approaches the rapidly growing arena of perpetual futures, including how the Internal Revenue Service (IRS) taxes these contracts.
The core of the dispute lies in 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, which aligns with the statutory definition of a swap under US law. 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's price. If perpetual contracts are classified as futures, many institutional traders could receive a blended tax treatment under Section 1256 of the US tax code, where gains and losses are generally treated as 60% long-term and 40% short-term capital gains.
However, if they are deemed swaps, they would be taxed under 'ordinary' taxation. Given the novelty of perpetual futures, the IRS has not provided specific guidance on their tax treatment. This lack of clarity could lead to uncertainty for market participants who have been treating these contracts as futures for tax purposes, potentially facing issues when reporting their positions to the IRS if the contracts are ultimately ruled to be swaps. Legal experts emphasize that the issue is complex, with the textual structure of perpetual futures resembling swaps but their economic performance akin to futures, making it a 'substance-over-form' question.
The broad definition of swaps under the statute adds to the uncertainty, leaving considerable room for interpretation regarding its application to new financial products like perpetual futures. The resolution of this issue will depend on how the court interprets the statutes, particularly in light of the Supreme Court's 2024 Loper Bright decision, which reduced the deference given to agencies' interpretations of ambiguous statutes.
This could lead to a lengthy litigation process, with experts anticipating that the Supreme Court may eventually need to weigh in. Even if the litigation clarifies the classification of perpetual contracts, tax treatment may still require separate guidance from the IRS, which is not obligated to adopt the CFTC's interpretation. Until there is greater clarity from regulators, tax authorities, or the courts, large institutions may face uncertainty over how to report trades involving perpetual futures, potentially leading to significant tax implications.