IRS Cracks Down on Crypto ETF Tax Maneuvers

The IRS and Treasury Department have escalated their scrutiny of crypto ETFs, focusing on in-kind redemptions that may be used to artificially limit taxable gains.

Treasury Secretary Scott Bessent emphasized that the agencies are 'serious about cracking down on transactions designed to dodge taxes or exploit our federal tax code.'

The notice targets a mechanism called in-kind transfers, where a fund can distribute appreciated assets directly to an authorized participant without recognizing the embedded gain.

Treasury rejected prearranged trades that let investors swap portfolios while avoiding recognition of built-in gains, calling them 'transactions that don't work under existing law.'