The approval of perpetual futures contracts in the US could lead to unforeseen tax and regulatory challenges for traders if these products are ultimately classified as swaps rather than futures, warns CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy emphasized that the ambiguity surrounding the tax implications for US participants has received insufficient attention. The comments come as CME continues to challenge the Commodity Futures Trading Commission (CFTC) over its approval of perpetual futures contracts, with the outcome of the federal court decision potentially having a significant impact on the US approach to perpetual futures. A key consequence of this dispute is how the Internal Revenue Service (IRS) will ultimately tax these contracts.
The disagreement stems from whether perpetual futures should be legally treated as futures or swaps. Duffy argues that perpetual futures should be categorized as swaps due to the periodic funding payments exchanged between long and short positions, which satisfies the statutory definition of a swap under US law. If perpetual contracts are deemed swaps, they will be taxed under ordinary taxation, whereas if they are considered futures, many institutional traders may receive a blended tax treatment. The IRS has not provided guidance on the tax treatment of perpetual futures, leading to uncertainty for market participants.
Legal experts agree that the issue is complex, with the definition of swaps being extremely broad and the challenge lying in determining the substance over form. The Supreme Court's 2024 Loper Bright decision has eliminated the Chevron doctrine, giving federal courts less deference to agencies' interpretations of ambiguous statutes. This may lead to a lengthy litigation process, with the tax treatment potentially requiring separate guidance from the IRS.