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 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 unclear status of perpetual futures.
This ambiguity stems from the legal challenge by CME against the Commodity Futures Trading Commission (CFTC) regarding the regulator's approval of perpetual futures contracts. The outcome of this challenge could significantly influence how the US approaches the rapidly growing arena of perpetual futures, particularly in terms of taxation by the Internal Revenue Service (IRS). The core issue revolves around 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 satisfies the statutory definition of a swap under US law. If perpetual contracts are deemed swaps, they would be taxed under 'ordinary' taxation, unlike the blended tax treatment available for futures under Section 1256 of the US tax code.
This discrepancy could lead to uncertainty for market participants who have been treating perpetual futures as futures for tax purposes. Legal experts, such as Rustin Diehl and Jason Gottlieb, emphasize that the issue is complex, involving a 'substance-over-form' question where the economic function of perpetual futures resembles that of futures, despite their structural similarity to swaps.
The broad definition of swaps and the recent Supreme Court decision eliminating the Chevron doctrine, which reduces deference to agencies' interpretations of ambiguous statutes, further complicate the matter. This could lead to a lengthy litigation process, with courts playing a significant role in interpreting existing derivatives laws as they apply to novel financial products like perpetual futures. Ultimately, the tax treatment of perpetual futures may require separate guidance from the IRS, potentially leading to continued uncertainty for large institutions trading these contracts.