The approval of perpetual futures contracts in the US may expose traders to unforeseen tax and regulatory uncertainty if these products are ultimately classified as swaps rather than futures, a matter that has garnered little public attention, warns CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy pointed out the ambiguity surrounding the tax implications for US participants. This comes as CME continues to challenge the Commodity Futures Trading Commission (CFTC) in court over the regulator's approval of perpetual futures contracts, with the outcome potentially influencing the US approach to this rapidly growing market.
A key consequence, according to Duffy, involves how the Internal Revenue Service (IRS) will tax these contracts. The dispute centers on whether perpetual futures should be legally categorized as futures or swaps, with Duffy arguing they should be considered swaps due to the periodic funding payments exchanged between long and short positions, satisfying the statutory definition of a swap under US law. If perpetual contracts are deemed swaps, they would be taxed under 'ordinary' taxation, rather than the blended tax treatment available for futures under Section 1256 of the US tax code. Given the novelty of perpetual futures, the IRS has not provided specific guidance on their tax treatment, potentially leading to uncertainty for market participants if the classification changes.
Legal experts, however, view the issue as complex, involving a 'substance-over-form' question where the economic function of perpetual futures resembles that of futures, despite their structural similarity to swaps. The definition of swaps is broad, leaving room for interpretation, especially with the Supreme Court's 2024 Loper Bright decision reducing deference to agencies' interpretations of ambiguous statutes. This could lead to a lengthy litigation process, with courts potentially ignoring the CFTC's interpretation and reading the statute independently. Ultimately, clarity on the tax treatment of perpetual futures may require separate guidance from the IRS, which is not bound to adopt the CFTC's definitions.
Until then, large institutions may face uncertainty in reporting trades involving perpetual futures, highlighting the need for regulatory, tax, or court clarification to avoid potential tax evasion issues and ensure proper tax reporting.