IRS Targets Tax Strategy Used by Some Crypto ETFs

The IRS is scrutinizing a tax strategy used in some crypto ETFs (Exchange-Traded Funds) in the United States. The Treasury Department has requested information on this matter, indicating that it may issue additional guidance or enforcement actions if necessary.

At the center of the analysis is a rule applied to Regulated Investment Companies (RICs), which typically must derive at least 90% of their annual gross income from qualifying sources. Some funds are arguing for excluding unrealized gains on commodity or digital asset transactions from this calculation.

The Treasury is particularly concerned with in-kind redemptions, a mechanism already adopted by some crypto ETFs after the SEC approved spot product creations and redemptions of this type. Under current rules, ETFs may distribute appreciated property in qualified redemptions without recognizing embedded gains.

However, the regulators are not challenging traditional ETF redemptions but rather structures that exploit these operations to produce tax effects that may have little relation to the fund's underlying economics.