The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty, as the classification of these contracts as either swaps or futures remains ambiguous, according to CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy pointed out that there is a lack of clarity regarding the tax implications for US participants. The comments come as CME continues its legal challenge against the Commodity Futures Trading Commission (CFTC) over the regulator's approval of perpetual futures contracts in the US.
The outcome of this court decision could have a significant influence on how the US approaches the rapidly growing market of perpetual futures. A key consequence of this dispute is how the Internal Revenue Service (IRS) will ultimately tax these contracts. The main issue stems from whether perpetual futures should be legally treated as futures or swaps. Duffy argued that perpetual futures should be classified as swaps due to the periodic funding payments exchanged between long and short positions, which he believes satisfies 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, and market participants who have been treating them as futures for tax purposes may face uncertainty about how to report those positions to the IRS if the classification changes. Legal experts note that the issue is complex, with the textual structure of perpetual futures resembling swaps, but their economic function being similar to futures.
The definition of swaps is extremely broad, leaving room for interpretation. The Supreme Court's 2024 Loper Bright decision has also impacted the situation, as federal courts now give less deference to agencies' interpretations of ambiguous statutes.
This may lead to a lengthy litigation process, with the potential for tax evasion and a need for separate guidance from the IRS. Until regulators, tax authorities, or the courts provide greater clarity, large institutions may face uncertainty over how to report trades involving perpetual futures.