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The IRS just put one of the ETF wrapper’s biggest selling points — tax efficiency — under review, and crypto funds are squarely in its sights.
What happened
- The IRS issued Revenue Ruling 2026-20 and Notice 2026-62 on Sept. 28–29, targeting funds that use in-kind redemptions and Section 351 swaps to keep crypto and commodity gains off their books and sidestep the 90% qualifying-income test for regulated investment companies. The notice names no specific funds, but explicitly covers “ETFs that redeem out commodity or digital-asset gains to pass the RIC income test.”
- The move arrives alongside more than $7.22 billion in in-kind crypto redemptions by two BlackRock products in the six months ended June 30, 2026: the iShares Bitcoin Trust paid out $5.49 billion in BTC for share redemptions, and the iShares Ethereum Trust paid out $1.72 billion in ETH, per TokenPost citing fund filings.
- Treasury warned the coming guidance could apply retroactively to transactions that already took place, and that the flagged strategies may be designated listed transactions or transactions of interest. Public comments are due Oct. 28, 2026 (docket IRS-2026-1255).
- Nuance matters: Bloomberg’s James Seyffart noted on Sept. 28 that “the language here is pretty broad” and “might have a big impact,” while KuCoin’s coverage pointed out that spot Bitcoin ETFs structured as grantor trusts pass tax attributes to shareholders and may be less exposed — the exposure sits with regular funds holding crypto or shares of such trusts directly.
Why it matters
Tax efficiency is a core reason ETFs attracted roughly $57.6 billion in cumulative spot Bitcoin inflows and tens of billions more across Ether, Solana and XRP products. If the IRS forces in-kind redemptions of digital assets to count toward the income test, affected funds may face higher tax costs or be forced to restructure, eroding the advantage over direct ownership.
This is also a broader sweep than crypto: the same notices cover box-spread ETFs, partnership “exchange funds,” record-date ETF dividend swaps and tax-aware character trades — a signal that Washington is tightening ETF tax arbitrage across the board.
What to watch
- Oct. 28 comment deadline — industry pushback could narrow the scope or secure prospective-only treatment.
- Whether final guidance applies retroactively, as the notice explicitly reserves that right.
- Whether the strategies are designated “listed transactions,” which would trigger Form 8886 disclosure obligations for taxpayers and material advisors.
- Fund managers’ responses — any changes to in-kind redemption policies at major issuers would be a tell.
Related reading: Morgan Stanley Files Spot Bitcoin ETF at 0.14% — Cheapest on the Market | Tracking the CLARITY Act: Crypto Regulation Hub
How would a retroactive change to ETF in-kind tax treatment affect your decision to hold crypto ETFs versus owning crypto directly?
Sources: KuCoin | TokenPost | Wealth Strategies Journal | BeInCrypto/CryptoRank
Auto-posted by the Bull Lounge news desk.
Not financial advice.
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