U.S. approval of perpetual futures contracts could expose traders to unforeseen tax and regulatory consequences if the products are ultimately classified as swaps rather than futures — an issue that has drawn little public scrutiny, according to CME Group Chairman and CEO Terry Duffy.

Perpetual futures, which originated in offshore crypto trading venues and have grown into the most heavily traded category of crypto derivative globally, have only recently begun entering the U.S. regulated market. Their introduction to listed U.S. exchanges marks a significant shift for a product that has operated largely outside traditional regulatory frameworks.

"There's a consequence that nobody's talking about," Duffy said in an interview with CoinDesk. "There's ambiguity right there, from a tax perspective, for all U.S. participants now."

Duffy's remarks come as CME Group — itself a major operator of listed crypto futures and options — pursues its legal challenge against the Commodity Futures Trading Commission (CFTC) over the regulator's approval of perpetual futures contracts in the United States. Both parties are awaiting a federal court ruling that could significantly shape how the U.S. approaches the fast-growing market for perpetual futures. A central concern raised by Duffy is how the Internal Revenue Service (IRS) will ultimately tax these instruments.

Futures or Swaps?

At the heart of the dispute is whether perpetual futures should be legally treated as futures or as swaps.

Duffy contends that perps should fall under the legal definition of swaps — contrary to the CFTC's classification of them as futures — because of the periodic funding payments exchanged between long and short positions.

Unlike traditional futures, perpetual contracts never expire. Instead, traders periodically exchange funding payments designed to keep the derivative's price aligned with the underlying asset. Duffy argues that these 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 integral to perpetual contracts.

The core problem Duffy identifies with this classification mismatch relates to taxation. If perpetual contracts qualify as futures, many institutional traders could benefit from the blended tax treatment available under Section 1256 of the U.S. tax code, under which gains and losses are generally treated as 60% long-term and 40% short-term capital gains. If, however, those contracts are deemed swaps, they would be subject to "ordinary" income taxation.

Because perpetual futures are relatively new financial instruments, the IRS has not yet issued guidance specifically addressing their tax treatment. If regulators or courts ultimately conclude that perpetual contracts are swaps rather than futures, market participants who have been reporting them as futures for tax purposes could face significant uncertainty about how to properly file with 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, note that the issue is considerably more nuanced.

"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, an Emeritus Fellow at Georgetown Law's Institute for International Economic Law, and a professor of business law at Weber State University. "It's really a substance-over-form question … function versus text."

Compounding the uncertainty, legal experts point out that the statutory definition of swaps is exceptionally 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 when applied to new financial products such as perpetual futures.

Ultimately, much will depend on how the courts interpret the matter. The Supreme Court's 2024 Loper Bright decision eliminated the longstanding Chevron doctrine, meaning federal courts now give less deference to agency interpretations of ambiguous statutes. As a result, judges could play a substantially larger role in determining how existing derivatives laws apply to novel crypto products — a shift that adds another layer of unpredictability for market participants navigating an already ambiguous regulatory landscape.

A Lengthy Legal Road Ahead

The process is likely to be protracted.

"My view is that there's going to be a lot of litigation about it, and the Supreme Court has told courts that if there is ambiguity in the statute, they can ignore the CFTC and read the statute for themselves," Gottlieb said.

Rather than immediately ruling on whether the products should be classified as swaps or futures, a federal judge is more likely to first examine whether the regulator reasonably considered public comments and adequately explained its decision before approving the contracts, Diehl said.

"I think the judge is going to focus on the Administrative Procedure Act, and kind of look at the question of did the CFTC really exercise independent judgment? Were they thorough? Were they reasoned? Did they express their reasoning?" he said.

Even if the litigation ultimately resolves whether perpetual contracts are swaps or futures, tax treatment may still require separate IRS guidance. The IRS is not obligated to adopt the CFTC's interpretation of financial instruments, Diehl noted.

"I think people are going to want to maybe check with the IRS and see how they should report these," said Diehl. "They [IRS] generally do agree with the CFTC's definitions of commodities historically, but there's been many times when the IRS doesn't just agree with a taxpayer submitting their tax position based on CFTC rules."

Until regulators, tax authorities, or the courts provide greater clarity, Duffy warned that large institutions face ongoing uncertainty over how to report trades involving perpetual futures.

"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," said Duffy.