The approval of perpetual futures contracts in the US may lead to unforeseen tax and regulatory complications for traders if these products are ultimately deemed to be swaps, according to CME Group Chairman and CEO Terry Duffy. In an interview, Duffy pointed out the existing ambiguity from a tax perspective for all US participants. This issue has received little public attention despite its potential consequences.
The comments come as CME continues to challenge the Commodity Futures Trading Commission's (CFTC) approval of perpetual futures contracts in the US, with the outcome of the federal court decision likely to significantly influence the US approach to perpetual futures. A key consideration is how the Internal Revenue Service (IRS) will tax these contracts, with the dispute centering on whether perpetual futures should be legally treated as futures or swaps. Duffy argues that perpetual contracts should be classified as swaps due to the periodic funding payments exchanged between long and short positions, which he believes satisfies the statutory definition of a swap under US law. If perpetual contracts are deemed swaps, they will be taxed under 'ordinary' taxation, unlike the blended tax treatment available for futures under Section 1256 of the US tax code.
However, legal experts consider the issue more complex, with the definition of swaps being extremely broad and the economic function of perpetual futures resembling that of traditional futures. The outcome will depend on the court's interpretation, and it may lead to a long, drawn-out process with potential litigation and the need for separate IRS guidance on tax treatment.