CME’s Duffy warns an overlooked tax risk looms over U.S. perpetual futures

CME CEO Terry Duffy said a court battle over whether perpetual futures are swaps or futures could eventually affect how the IRS taxes the contracts. Independent legal experts say the issue remains unresolved.

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Unlike traditional futures, perpetual contracts never expire. Instead, traders periodically exchange funding payments intended to keep the derivative’s price close to that of the underlying asset. Duffy argued that those recurring payment exchanges satisfy the statutory definition of a swap under U.S. law.

“When two parties exchange payments to each other, that is deemed a swap,” he said, referring to the funding-rate mechanism used by perpetual contracts.

What Duffy sees as the main problem with this mismatched designation is that if perpetual contracts qualify as futures, many institutional traders could receive the blended tax treatment available under Section 1256 of the U.S. tax code. Under this, gains and losses are generally treated as 60% long-term and 40% short-term capital gains. If those contracts fall under swaps, they will be taxed under “ordinary” taxation. Given that the perps are newer innovations, the IRS has not issued guidance specifically addressing the tax treatment of perpetual futures.

So if the regulators or courts ultimately conclude that perpetual contracts are swaps rather than futures, market participants who have been treating them as futures for tax purposes could face uncertainty about how to report those positions to the IRS.

“So if you file your tax return and this ruling comes back, where these products that you’ve been trading and filing government tax returns as 1256 contracts [futures], when it should be ordinary, I will be curious what the IRS has to say to you about how much they think you owe them because you didn’t file your tax returns properly,” Duffy said.

‘Substance over form’

Legal experts, however, said that the issue is much more complex than that.

“The challenge here is that textually, by the structure, perpetual futures look a lot like a swap, but economically they perform a lot like futures,” said Rustin Diehl, a tax attorney and counselor at Allegis Law and an Emeritus Fellow at Georgetown Law’s Institute for International Economic Law and professor of business law at Weber State University. “It’s really a substance-over-form question … function versus text.”

Adding to the uncertainty, legal experts say that the definition of swaps is extremely broad.

“Basically, the statutory definition of swaps is so broad as to encompass … anything,” Jason Gottlieb, partner and chair of Morrison Cohen’s digital assets practice, told CoinDesk. He added that the breadth of the statutory language leaves considerable room for interpretation regarding its application to new financial products such as perpetual futures.

What it will come down to is how the court interprets it.

That’s because the Supreme Court’s 2024 Loper Bright decision eliminated the longstanding Chevron doctrine; federal courts now give less deference to agencies’ interpretations of ambiguous statutes, meaning judges could play a larger role in deciding how existing derivatives laws apply to novel crypto products.