The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty, as the products' classification as swaps or futures remains ambiguous, according to CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy emphasized that there is a consequence that nobody is discussing, referring to the 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 considered swaps due to the periodic funding payments exchanged between long and short positions. This designation could significantly influence how the US approaches the rapidly growing arena of perpetual futures, particularly in terms of tax treatment. If perpetual contracts qualify as futures, many institutional traders could receive a blended tax treatment, but if they are classified as swaps, they will be taxed under ordinary taxation.
Given the lack of guidance from the IRS on the tax treatment of perpetual futures, market participants who have been treating them as futures for tax purposes could face uncertainty about how to report those positions to the IRS. Legal experts consider the issue complex, with the definition of swaps being extremely broad and the challenge being a substance-over-form question. The outcome of the court decision could have significant implications for the tax treatment of perpetual futures, and it may ultimately come down to how the court interprets the statutory definition of swaps.
The process is likely to be long and drawn out, with potential litigation and the need for separate guidance from the IRS.