The approval of perpetual futures contracts in the US could lead to unexpected tax and regulatory uncertainty for traders if these contracts are ultimately deemed to be swaps rather than futures, a concern highlighted 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.
This comes as CME continues its 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 challenge could significantly influence how the US approaches the rapidly growing arena of perpetual futures, particularly in regards to how the Internal Revenue Service (IRS) will tax these contracts. The core of the dispute lies in whether perpetual futures should be legally treated as futures or swaps, with Duffy arguing that they should fall under the definition of swaps due to the periodic funding payments exchanged between long and short positions, which he believes satisfies the statutory definition of a swap under US law. Unlike traditional futures, perpetual contracts do not expire and instead involve periodic funding payments to keep the derivative's price close to the underlying asset.
Duffy's concern is that if perpetual contracts are classified as futures, many institutional traders could receive a blended tax treatment under Section 1256 of the US tax code, which treats gains and losses as 60% long-term and 40% short-term capital gains. However, if these contracts are deemed swaps, they would be taxed under 'ordinary' taxation, and given the novelty of perpetual futures, the IRS has not provided specific guidance on their tax treatment. Legal experts, including Rustin Diehl and Jason Gottlieb, note that the issue is complex, with the definition of swaps being extremely broad and the economic function of perpetual futures resembling that of traditional futures. The resolution of this issue may ultimately depend on court interpretation, especially given the Supreme Court's 2024 Loper Bright decision, which reduced the deference given to agencies' interpretations of ambiguous statutes.
This could lead to a lengthy litigation process, with the potential for the IRS to provide separate guidance on tax treatment regardless of the CFTC's interpretation. Until there is clarity from regulators, tax authorities, or the courts, large institutions may face uncertainty in reporting trades involving perpetual futures, potentially leading to significant tax implications.