{"id":13872,"date":"2026-09-29T17:16:50","date_gmt":"2026-09-29T17:16:50","guid":{"rendered":"https:\/\/cryptonews.uk.com\/?p=13872"},"modified":"2026-09-29T17:16:50","modified_gmt":"2026-09-29T17:16:50","slug":"a-7-billion-crypto-etf-plumbing-boom-just-ran-into-the-irs","status":"publish","type":"post","link":"https:\/\/cryptonews.uk.com\/?p=13872","title":{"rendered":"A $7 billion crypto ETF plumbing boom just ran into the IRS"},"content":{"rendered":"

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The Internal Revenue Service (IRS) is scrutinizing a crypto-linked ETF tax strategy as Washington intensifies its campaign against structures designed to avoid taxable gains.<\/p>\n

The Treasury Department and IRS identified digital assets as one area where fund managers may be stretching tax provisions beyond their intended purpose, opening the door to additional rules or enforcement.<\/p>\n

On X, Treasury Secretary Scott Bessent said the agencies were \u201cserious about cracking down on transactions designed to dodge taxes or exploit our federal tax code,\u201d casting the notice as part of a broader push against tax-motivated investment strategies.<\/p>\n

The move puts a fresh tax question over a crypto ETF market that has spent the past year adopting the same in-kind machinery long used by traditional funds. Last year, the Securities and Exchange Commission (SEC) approved in-kind creations and redemptions for spot crypto exchange-traded products, saying the change could reduce costs and price slippage.<\/p>\n

Treasury stopped short of challenging the conventional ETF redemptions. Instead, its concern centers on structures that use those transactions to achieve tax outcomes regulators say may bear little relationship to a fund\u2019s underlying economics.<\/p>\n

Crypto enters the IRS crosshairs through a 90% tax test<\/h2>\n

At issue is a rule governing regulated investment companies (RICs), which include much of the US ETF industry.<\/p>\n

To preserve their favorable tax treatment, RICs generally must derive at least 90% of annual gross income from qualifying sources, including dividends, interest, and gains involving stocks, securities, and certain currencies.<\/p>\n

Treasury said some ETFs argue they can keep gains from assets outside those categories out of the calculation altogether.<\/p>\n

The notice specifically points to funds holding commodities or digital assets, either directly or through a grantor trust. Instead of selling an appreciated position, the fund can use it to satisfy an in-kind redemption by an authorized participant.<\/p>\n

Under Section 852(b)(6), ETFs can generally distribute appreciated property during qualifying redemptions without recognizing the embedded gain. Some funds therefore contend that the unrecognized gain should also be excluded when determining whether they passed the RIC income test.<\/p>\n

Treasury said the strategy could allow an ETF to limit the income subject to the 90% threshold regardless of its actual economic income, signaling skepticism toward that interpretation.<\/p>\n

That does not amount to a ban. The government has requested information on the practice and is considering what action, if any, should follow.<\/p>\n

Its treatment contrasts with another strategy caught in the same regulatory sweep. Revenue Ruling 2026-20 rejects certain prearranged transactions in which investors contribute appreciated securities to an ETF before quickly removing those assets through redemptions, allowing investors to emerge with a different portfolio without initially recognizing the embedded gain.<\/p>\n

Bessent was more categorical about those Section 351 conversions, saying the transactions \u201cdon\u2019t work under existing law.\u201d<\/p>\n

The IRS said the arrangements can be recharacterized as taxable exchanges, putting them at a more advanced stage of the government\u2019s crackdown than the digital-asset strategy identified in the accompanying notice.<\/p>\n