The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty if these products are ultimately deemed to be swaps rather than futures, a concern 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 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. Both sides await a federal court decision, which could significantly influence how the US approaches the rapidly growing arena of perpetual futures. One potential consequence, according to Duffy, is how the Internal Revenue Service (IRS) ultimately taxes these contracts. The dispute stems from whether perpetual futures should be legally treated as futures or swaps.
Duffy argued that perpetual contracts should fall under the legal definition of swaps due to the periodic funding payments exchanged between long and short positions. Unlike traditional futures, perpetual contracts never expire; instead, traders periodically exchange funding payments to keep the derivative's price close to that of the underlying asset. Duffy contended that these recurring payment exchanges satisfy the statutory definition of a swap under US law.
'When two parties exchange payments to each other, that is deemed a swap,' he said, referring to the funding-rate mechanism used by perpetual contracts. The main issue with this mismatched designation, according to Duffy, is that if perpetual contracts qualify as futures, many institutional traders could receive blended tax treatment under Section 1256 of the US tax code.
However, if these contracts are classified as swaps, they will be taxed under 'ordinary' taxation. Given that perpetual futures are newer innovations, the IRS has not issued guidance specifically addressing their tax treatment. If regulators or courts ultimately conclude that perpetual contracts are swaps rather than 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 noted that the issue is complex, with the definition of swaps being extremely broad. 'The challenge here is that textually, by the structure, perpetual futures look a lot like a swap, but economically they perform a lot like futures,' said Rustin Diehl, a tax attorney. 'It's really a substance-over-form question … function versus text.' The Supreme Court's 2024 Loper Bright decision eliminated the longstanding Chevron doctrine, meaning federal courts now give less deference to agencies' interpretations of ambiguous statutes.
As a result, judges could play a larger role in deciding how existing derivatives laws apply to novel crypto products. The process is likely to be long and drawn out, with potential litigation and a need for separate guidance from the IRS. Until regulators, tax authorities, or the courts provide greater clarity, Duffy warned that large institutions could face uncertainty over how to report trades involving perpetual futures.