CME's Duffy Highlights Overlooked Tax Risk Associated with US Perpetual Futures

The approval of perpetual futures contracts in the US could lead to unforeseen tax and regulatory uncertainty for traders if these contracts are ultimately deemed to be swaps rather than futures, a matter that has garnered little public attention, according to Terry Duffy, Chairman and CEO of CME Group. In an interview with CoinDesk, Duffy stated, 'There's a consequence that nobody's talking about. There's ambiguity right there, from a tax perspective, for all US participants now.' These comments come amidst CME's ongoing legal challenge against the Commodity Futures Trading Commission (CFTC) over the regulator's approval of perpetual futures contracts in the US. The outcome of this federal court decision could significantly influence the US approach to the rapidly growing arena of perpetual futures, including how the Internal Revenue Service (IRS) taxes these contracts.

The dispute centers on whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing that they should be classified as 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 will be taxed under 'ordinary' taxation, rather than the blended tax treatment available under Section 1256 of the US tax code for futures. Given the novelty of perpetual futures, the IRS has not provided specific guidance on their tax treatment, leading to potential uncertainty for market participants if the classification of these contracts changes. Legal experts, including Rustin Diehl and Jason Gottlieb, note that the issue is complex and may require court interpretation, given the broad definition of swaps and the elimination of the Chevron doctrine, which previously allowed federal courts to defer to agencies' interpretations of ambiguous statutes.

The process of resolving this issue is likely to be lengthy and may involve litigation, with tax authorities potentially providing separate guidance on the tax treatment of perpetual futures.