The approval of perpetual futures contracts in the US could lead to unforeseen tax and regulatory uncertainty for traders if these contracts are ultimately classified as swaps rather than futures, a concern raised by CME Group Chairman and CEO Terry Duffy. In an interview with CoinDesk, Duffy pointed out the ambiguity surrounding the tax perspective for all US participants due to the lack of clarity on whether perpetual futures should be considered swaps or futures. This ambiguity stems from the periodic funding payments exchanged between long and short positions in perpetual contracts, which Duffy believes aligns with the statutory definition of a swap under US law.
Unlike traditional futures, perpetual contracts do not expire and involve recurring funding payments to keep the derivative's price close to the underlying asset's price. Duffy argued that this mechanism satisfies the definition of a swap. The main issue with the current designation is that if perpetual contracts are considered futures, institutional traders might receive a blended tax treatment, with gains and losses treated as 60% long-term and 40% short-term capital gains. However, if these contracts are classified as swaps, they would be taxed under 'ordinary' taxation, leading to potential uncertainty for market participants who have been treating them as futures for tax purposes.
Legal experts emphasize that the issue is complex, with the textual structure of perpetual futures resembling swaps but functioning economically like futures, making it a 'substance-over-form' question. The definition of swaps is broad, leaving room for interpretation regarding its application to new financial products like perpetual futures. The outcome of the court case and the subsequent tax implications will depend on how the court interprets the existing derivatives laws.
This process is likely to be lengthy, with potential litigation and the need for separate guidance from the IRS, which may not adopt the CFTC's interpretation of financial instruments. Until regulators, tax authorities, or courts provide clarity, large institutions may face uncertainty over reporting trades involving perpetual futures, potentially leading to tax complications.