The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory risks if these products are ultimately classified as swaps rather than futures, a matter that has received little attention, according to CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy stated, 'There's a consequence that nobody's talking about. There's ambiguity right there, from a tax perspective, for all US participants now.' The ambiguity stems from the legal distinction between futures and swaps, with Duffy arguing that perpetual futures should be categorized as swaps due to the periodic funding payments exchanged between long and short positions. Unlike traditional futures, perpetual contracts do not expire and involve periodic funding payments to maintain the derivative's price close to the underlying asset.
Duffy believes that these recurring payment exchanges meet the statutory definition of a swap under US law. The main issue with this designation is that if perpetual contracts are considered futures, many institutional traders may receive a blended tax treatment, but if they are classified as swaps, they will be taxed under 'ordinary' taxation. Given the novelty of perpetual futures, the IRS has not issued specific guidance on their tax treatment. If regulators or courts ultimately conclude that perpetual contracts are swaps, market participants who have been treating them as futures for tax purposes may face uncertainty about how to report these positions to the IRS.
Legal experts, however, consider the issue more complex, stating that the challenge lies in determining whether perpetual futures are economically similar to swaps or futures. The definition of swaps is extremely broad, leaving room for interpretation regarding its application to new financial products like perpetual futures.
The outcome of the court case will significantly influence how the US approaches perpetual futures, and it may come down to how the court interprets the existing derivatives laws. The process is likely to be long and drawn out, with potential litigation and the need for separate guidance from the IRS.