IRS Cracks Down on Crypto ETFs Using Tax Loophole

The IRS has issued a notice targeting crypto ETFs (exchange-traded funds) that use a trading trick to keep gains off their books.

Most US funds get a special tax status, paying no tax themselves as long as at least 90% of their income comes from dividends, interest, and stock gains. However, profits on crypto and commodities do not count towards this threshold.

The IRS says some ETFs have found a way around this rule by handing rising digital assets to Wall Street trading firms that cash in fund shares without booking a taxable gain.

The notice names no specific funds but targets regular funds that hold crypto or shares of trusts, such as the iShares Bitcoin Trust. Funds that hold these assets through an offshore subsidiary fall outside the notice.