IRS Targets Crypto ETFs with Loophole Tax Warning
The IRS has issued a notice targeting crypto ETFs that use a trading trick to keep gains off their books. This move comes on the same day the IRS shut down a tax-free stock swap used by wealthy investors, both of which target the same ETF rule.
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. A rule allows ETFs to make these hand-offs without booking a taxable gain, which means no bad income is recorded.
The notice names no specific funds but warns that any fix could reach backward, applying prospectively only or retroactively to transactions already completed.