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, Duffy emphasized that there is a consequence of this ambiguity that has not been publicly discussed, particularly from a tax perspective for all 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 dispute centers on whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing that they should be classified as swaps due to the periodic funding payments exchanged between long and short positions.
This classification could significantly influence how the US approaches the rapidly growing arena of perpetual futures and how the Internal Revenue Service (IRS) ultimately taxes these contracts. The mismatched designation could lead to institutional traders receiving blended tax treatment under Section 1256 of the US tax code if perpetual contracts qualify as futures, but if they are classified as swaps, they will be taxed under ordinary taxation. As the IRS has not issued guidance specifically addressing the tax treatment of perpetual futures, market participants may face uncertainty about how to report these positions to the IRS if the regulators or courts ultimately conclude that perpetual contracts are swaps rather than futures.
Legal experts agree that the issue is complex, with the definition of swaps being extremely broad and the challenge being a substance-over-form question, where the function of perpetual futures is more similar to futures, but their structure resembles swaps. The Supreme Court's 2024 Loper Bright decision has eliminated the longstanding Chevron doctrine, allowing federal courts to play a larger role in deciding how existing derivatives laws apply to novel crypto products, which may lead to a long and drawn-out process of litigation. Until regulators, tax authorities, or the courts provide greater clarity, large institutions could face uncertainty over how to report trades involving perpetual futures, potentially leading to tax evasion issues and the need for separate guidance from the IRS.