Treasury and IRS Flag Crypto ETF Tax Strategies
The Treasury Department and IRS have issued a notice flagging tax-motivated investment strategies involving digital assets. The notice, Notice 2026-62, requests information on these practices but does not impose a ban. Instead, it leaves open what action will follow.
The agencies identified in-kind redemption strategies used by regulated investment companies as an area where fund managers may be stretching tax provisions beyond their intended purpose. Regulators could respond with new regulations, additional rulings, or other guidance and designate certain arrangements as transactions of interest or listed transactions, which carry heightened reporting requirements.
A companion Revenue Ruling 2026-20 rejects prearranged Section 351 transactions where investors contribute appreciated securities to an ETF and quickly redeem, emerging with a different portfolio without recognizing the embedded gain. Treasury Secretary Scott Bessent announced both documents in a post on X, stating that the agencies are 'serious about cracking down on transactions designed to dodge taxes or exploit our federal tax code.'
The warning comes as in-kind ETF plumbing has grown quickly. BlackRock's quarterly filings show its IBIT (iShares Bitcoin Trust ETF) distributed about $5.49 billion of Bitcoin through in-kind redemptions in the first six months of 2026, roughly $3.85 billion of it in the second quarter, and received about $9.36 billion in kind. Its ETHA (iShares Ethereum Trust ETF) distributed another $1.72 billion of Ethereum.
These trusts sit outside the specific test the notice targets. IBIT and ETHA are grantor trusts for federal income-tax purposes, so gains and losses pass through to shareholders rather than being subject to the RIC income test at the center of the notice.