Treasury and IRS seek information on crypto ETF in-kind redemption tax strategy
In brief
- Treasury and the IRS flagged digital assets as an area where fund managers may be stretching tax provisions.
- The notice requests information; it is not a ban or an action against any named fund.
- Revenue Ruling 2026-20 separately rejects certain prearranged Section 351 ETF conversions.
- IBIT and ETHA distributed about $7.22 billion in kind; CryptoSlate notes these grantor trusts aren't RIC-tested.
What Treasury is looking at
Regulated investment companies (RICs, a category that CryptoSlate says includes much of the US ETF industry) generally must derive at least 90% of annual gross income from qualifying sources to keep their favorable tax treatment. Under Section 852(b)(6), an ETF can generally distribute appreciated property during qualifying redemptions without recognizing the embedded gain.
Treasury didn't challenge that conventional mechanic.
Its concern is narrower. The notice pointed to funds holding commodities or digital assets, which can use an appreciated position to satisfy an in-kind redemption by an authorized participant instead of selling it (some of those funds contend the unrecognized gain should also be excluded when testing whether they passed the RIC income test). Treasury said the approach could let an ETF limit the income subject to the 90% threshold regardless of its actual economic income. The government is now weighing what action, if any, should follow.
Bessent's warning and the Section 351 ruling
Treasury Secretary Scott Bessent said in a post on X that the agencies were:
"serious about cracking down on transactions designed to dodge taxes or exploit our federal tax code,"
He was more categorical on a separate issue. Revenue Ruling 2026-20 rejected certain prearranged transactions in which investors contribute appreciated securities to an ETF before quickly removing those assets through redemptions. Bessent said those Section 351 conversions don't work under existing law, and the IRS said the arrangements can be recharacterized as taxable exchanges. That ruling concerns securities contributions; it's a different track from the digital-asset information request.
How much crypto moves in kind
The SEC approved in-kind creations and redemptions for spot crypto exchange-traded products last year, saying the change could reduce costs and price slippage. The filings show how big that channel has become.
BlackRock's iShares Bitcoin Trust ETF (IBIT) distributed about $5.49 billion of Bitcoin through in-kind redemptions in the first six months of 2026, according to its latest quarterly filing as cited by CryptoSlate, with roughly $3.85 billion of that coming in the second quarter. IBIT also received about $9.36 billion of Bitcoin through in-kind creations over the same stretch. The iShares Ethereum Trust ETF (ETHA) distributed $1.72 billion of Ethereum in kind through June, which puts the two BlackRock products at about $7.22 billion combined in six months.
Those numbers need context, though. CryptoSlate notes that IBIT and ETHA are treated as grantor trusts, so their gains pass through to shareholders rather than facing the RIC income test, and it says their in-kind flows aren't evidence that BlackRock uses the strategy Treasury identified. The notice doesn't name BlackRock or any other fund.
Frequently asked questions
What crypto ETF tax strategy is the IRS looking at?
Some funds holding commodities or digital assets can hand an appreciated position to an authorized participant in an in-kind redemption instead of selling it. Under Section 852(b)(6), that gain generally isn't recognized. Some funds contend it should also be excluded from the RIC 90% income test, which Treasury said could limit income subject to the threshold regardless of actual economic income.
Has the government banned the crypto ETF strategy?
No. The government has requested information on the practice and is considering what action, if any, should follow. Treasury also didn't challenge conventional ETF redemptions. Its concern is with structures using them to reach tax outcomes regulators said may bear little relationship to a fund's underlying economics.
What does Revenue Ruling 2026-20 cover?
The ruling rejects certain prearranged transactions in which investors contribute appreciated securities to an ETF and then quickly remove those assets through redemptions. Treasury Secretary Scott Bessent said these Section 351 conversions don't work under existing law, and the IRS said they can be recharacterized as taxable exchanges.
