CME’s Terry Duffy Warns of Tax Implications for Perpetual Futures

CME’s Terry Duffy Warns of Tax Implications for Perpetual Futures

Terry Duffy, CEO of CME Group, has raised concerns regarding potential tax risks for traders engaging in U.S. perpetual futures contracts. He indicated that ongoing litigation over the classification of these contracts – whether they are considered swaps or futures – could significantly impact how the IRS taxes them.

Legal Classification Implications

Duffy stated in an interview with CoinDesk, “There’s a consequence that nobody’s talking about. There’s ambiguity right there, from a tax perspective, for all U.S. participants.”
This issue has gained relatively little public attention as CME battles the Commodity Futures Trading Commission (CFTC) over the regulatory approval of these perpetual futures contracts.

IRS Tax Treatment Concerns

Perpetual futures differ from traditional futures as they do not have an expiration date and involve periodic funding payments between traders to maintain alignment with the underlying asset’s price. Duffy believes that these contracts should be considered swaps, due to their funding structure, which would result in a different tax treatment under U.S. law.

If classified as futures, traders may benefit from the capital gains treatment provided under Section 1256 of the U.S. tax code – taxing 60% of gains as long-term and 40% as short-term. Should they be deemed swaps, however, the products would be subject to ordinary income tax rules. Duffy noted the uncertainty this creates for market participants, explaining, “If the regulators or courts conclude that perpetual contracts are swaps and you’ve been treating them as futures, it could complicate how you report those positions to the IRS.”

Complex Legal Landscape

Legal experts echo Duffy’s concerns, emphasizing that the classification of perpetual futures remains a complicated issue. Rustin Diehl, a tax attorney, commented on the challenge of reconciling the structural appearance of perpetual futures as swaps with their economic function similar to futures. Jason Gottlieb, a partner at Morrison Cohen, highlighted the broad definition of swaps, indicating significant interpretative flexibility that courts will need to navigate.

Awaiting Clarity

The outcome of the ongoing legal dispute is uncertain, but it’s likely to take time. The Supreme Court’s recent decisions have shifted judicial responsibilities regarding the interpretation of regulatory statutes, potentially allowing judges to scrutinize the CFTC’s rationale closely.

Even if clarity is achieved regarding the classification of perpetual contracts, Duffy cautions that additional guidance from the IRS may still be necessary to determine tax treatment. “How would you like to be running a very large public company that trades a lot and hedges a lot, and all of a sudden you’re in the news for not paying proper taxes?” he asked, emphasizing the potential risks ahead.