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 either swaps or futures remains unresolved, warned CME Group Chairman and CEO Terry Duffy. In an interview, Duffy emphasized the ambiguity surrounding the tax implications for US participants. The issue stems from the legal definition of swaps versus futures and the periodic funding payments exchanged between long and short positions in perpetual contracts.
Unlike traditional futures, perpetual contracts do not expire and involve recurring funding payments to keep the derivative's price aligned with the underlying asset. Duffy argued that these payment exchanges meet the statutory definition of a swap under US law.
However, the main concern arises from the potential mismatch in designation, as perpetual contracts currently qualify for blended tax treatment under Section 1256 of the US tax code. If ultimately classified as swaps, these contracts would be subject to ordinary taxation, potentially causing uncertainty for market participants who have been treating them as futures for tax purposes. Independent legal experts acknowledge the complexity of the issue, citing the broad definition of swaps and the substance-over-form question.
The outcome of the court battle between CME and the Commodity Futures Trading Commission (CFTC) may significantly influence the US approach to perpetual futures, and the IRS may need to provide separate guidance on tax treatment. Until regulators, tax authorities, or courts provide clarity, large institutions may face uncertainty over reporting trades involving perpetual futures.