The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory risks if these contracts are ultimately classified as swaps rather than futures, according to CME Group Chairman and CEO Terry Duffy. This issue has received little attention, and its resolution could have significant implications for the taxation of these contracts. The Commodity Futures Trading Commission's (CFTC) approval of perpetual futures contracts is currently being challenged by CME in a federal court, with the outcome potentially influencing the US approach to this rapidly growing market. A key consequence of this dispute is how the Internal Revenue Service (IRS) will tax these contracts, with Duffy arguing that they should be treated as swaps due to the periodic funding payments exchanged between long and short positions.
Unlike traditional futures, perpetual contracts do not expire and instead involve periodic funding payments to maintain the derivative's price close to the underlying asset. If perpetual contracts are classified as futures, institutional traders may receive a blended tax treatment, but 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 the courts may ultimately decide the matter. Legal experts consider the issue complex, with the definition of swaps being extremely broad and the economic function of perpetual futures differing from their textual structure. The Supreme Court's 2024 Loper Bright decision has eliminated the Chevron doctrine, allowing federal courts to interpret ambiguous statutes with less deference to agencies, which could lead to a larger role for judges in deciding how existing derivatives laws apply to novel crypto products. The resolution of this issue is likely to be a long and drawn-out process, with potential litigation and the need for separate guidance from the IRS.
Until regulators, tax authorities, or the courts provide clarity, large institutions may face uncertainty over how to report trades involving perpetual futures, highlighting the need for careful consideration of the tax implications of these contracts.