The US Internal Revenue Service has issued a notice targeting specific tax practices used by exchange-traded funds holding digital assets. The regulator is scrutinizing methods that allow funds to avoid booking taxable gains when managing crypto and commodity holdings. These strategies involve transferring rising digital assets to trading firms to cash in shares without triggering tax liabilities.
The IRS notice applies to funds that hold assets directly or through trusts. While the document does not name specific products, it notes that spot Bitcoin ETFs, such as the iShares Bitcoin Trust, operate as grantor trusts and pass tax attributes to shareholders. Funds utilizing offshore subsidiaries for these holdings currently fall outside the scope of the new guidance.
The regulator has warned that future tax rules could be applied retroactively to transactions that have already occurred. The IRS is currently accepting public comments on the matter until October 28. This move follows the issuance of Revenue Ruling 2026-20, which prohibits certain tax-free stock swaps previously used by investors to diversify portfolios without immediate tax consequences.
Industry experts suggest the IRS is targeting strategies that deviate from the spirit of tax law, including Section 351 exchanges and various straddle or box spread techniques. The Investment Company Institute has argued that such conversions historically provided investors with better diversification and lower fees. Financial advisers are now being urged to review past client conversions.
