The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty, as the classification of these contracts as swaps or futures remains ambiguous, according to CME Group Chairman and CEO Terry Duffy. In an interview, Duffy emphasized that there is a looming consequence that has not been publicly discussed, related to the tax perspective for all US participants.
The comments come as CME continues its legal challenge against the Commodity Futures Trading Commission (CFTC) regarding the regulator's approval of perpetual futures contracts in the US. The core issue revolves around whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing that they should be categorized 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 keep the derivative's price aligned with the underlying asset. Duffy contends that these recurring payment exchanges meet the statutory definition of a swap under US law. The main concern with the current designation is that if perpetual contracts are classified as futures, many institutional traders may receive a blended tax treatment, while if they are deemed 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.
If regulators or courts ultimately conclude that perpetual contracts are swaps, market participants who have been treating them as futures for tax purposes may face uncertainty regarding how to report these positions to the IRS. Legal experts, however, note that the issue is complex and involves a substance-over-form question, with the definition of swaps being extremely broad and leaving room for interpretation. The outcome of the court decision could significantly influence how the US approaches perpetual futures, and the process is likely to be lengthy and involve considerable litigation.
Ultimately, tax treatment may still require separate guidance from the IRS, which is not obligated to adopt the CFTC's interpretation of financial instruments.