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 concern voiced by CME Group Chairman and CEO Terry Duffy. In an interview, Duffy pointed out the ambiguity surrounding the tax implications for US participants. The comments come as CME continues to challenge the Commodity Futures Trading Commission's (CFTC) approval of perpetual futures contracts, 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. The core issue revolves around whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing they should be considered swaps due to the periodic funding payments between long and short positions, which aligns with the statutory definition of a swap under US law.
This designation is crucial because if perpetual contracts are deemed futures, institutional traders may receive a blended tax treatment, but if classified as swaps, they will be taxed under ordinary taxation. Given the novelty of perpetual futures, the IRS has not provided specific guidance on their tax treatment. Legal experts, however, view the issue as more complex, highlighting that while perpetual futures structurally resemble swaps, they function economically like futures, making it a substance-over-form question.
The broad definition of swaps adds to the uncertainty, leaving considerable room for interpretation regarding its application to new financial products like perpetual futures. The resolution of this issue is likely to be a lengthy process, with litigation expected and the potential for the Supreme Court to play a role in interpreting how existing derivatives laws apply to novel crypto products.
Ultimately, the tax treatment may require separate guidance from the IRS, which may not align with the CFTC's interpretation, further complicating the situation for large institutions trading perpetual futures.