CME Group Chairman and CEO Terry Duffy has raised concerns that the U.S. approval of perpetual futures contracts could leave traders navigating significant tax and regulatory uncertainty, especially if these products are reclassified as swaps rather than futures. Speaking about the implications for market participants, Duffy stated that ambiguity around tax treatment remains largely overlooked by the industry.
Legal dispute over product classification
CME Group, one of the world’s largest derivatives marketplaces, is currently challenging the Commodity Futures Trading Commission (CFTC) over its framework for perpetual futures contracts in the United States. The ongoing legal battle centers on whether these contracts—known for having no expiry date and for frequent settlement payments—should be treated as traditional futures or as swaps under U.S. law.
Duffy argued that the presence of regular funding payments between counterparties aligns perpetual futures with the statutory definition of swaps. He cited the structure of these contracts, where traders periodically exchange payments to keep prices in line with the underlying asset, distinguishing them from fixed-expiration futures.
Perpetual contracts involve recurring payment exchanges, which, according to Duffy, satisfies the definition of a swap under U.S. regulation.
According to Duffy, if perpetual contracts are classified as futures, institutional participants could benefit from blended tax treatment under Section 1256 of the tax code, which offers 60% long-term and 40% short-term capital gains treatment. If reclassified as swaps, however, gains would be treated as ordinary income, potentially resulting in higher tax liabilities for traders.
Tax implications and regulatory ambiguity
The Internal Revenue Service (IRS) has yet to issue comprehensive guidance on the tax treatment of perpetual futures contracts, compounding concerns for market participants. Duffy emphasized that if regulators or courts eventually rule that these products are swaps, those who have already reported them as futures might find themselves at odds with the IRS, facing possible retroactive liabilities.
Duffy questioned what the IRS response would be if traders filed past tax returns categorizing these contracts as futures, only to have a court rule that they should be taxed as swaps.
Legal professionals have also pointed to the complexity in distinguishing between swaps and futures, noting that perpetual futures combine features of both product types.
Rustin Diehl, a tax attorney at Allegis Law and professor at Weber State University, highlighted the tension between the products’ economic function and their legal wording. He noted the challenge for regulators and courts to determine whether substance or form should prevail in classification.
Mini dictionary: CME Group — a Chicago-based global markets company that operates major derivatives exchanges and offers trading in a range of financial products, including futures and options.
Judicial and regulatory responses
Adding to the complexity, legal experts such as Jason Gottlieb, partner at Morrison Cohen, described the statutory definition of swaps as so broad that it may include a wide range of derivatives products. The lack of clarity leaves significant questions about how new offerings like perpetual futures will be regulated and taxed.
The recent Supreme Court decision in Loper Bright, which curtailed deference to federal agencies’ interpretations, places greater responsibility on judges to independently interpret ambiguous laws. Experts believe that, before the issue of classification is resolved, judges may first review whether the CFTC followed proper procedures and provided adequate reasoning in its approval process.
Even after litigation concludes, tax guidance from the IRS may not immediately align with any decision from the CFTC or the courts. Diehl noted the IRS tends to reference CFTC definitions for commodities but does not automatically adhere to them when determining tax obligations.
Until a final outcome emerges from regulators, the IRS, or the courts, Duffy cautioned that large trading firms and institutions could remain at risk over potential misreporting of trades involving perpetual futures.
He pointed out the reputational and financial hazards, remarking how major companies that routinely hedge and trade these products could be exposed to unexpected tax bills, and increased public scrutiny, if regulations change retroactively.
