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.
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’s underlying economics.
Crypto enters the IRS crosshairs through a 90% tax test
At issue is a rule governing regulated investment companies (RICs), which include much of the US ETF industry.
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.
Treasury said some ETFs argue they can keep gains from assets outside those categories out of the calculation altogether.
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.
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.
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.
That does not amount to a ban. The government has requested information on the practice and is considering what action, if any, should follow.
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.
Bessent was more categorical about those Section 351 conversions, saying the transactions “don’t work under existing law.”
The IRS said the arrangements can be recharacterized as taxable exchanges, putting them at a more advanced stage of the government’s crackdown than the digital-asset strategy identified in the accompanying notice.
Crypto in-kind infrastructure has already reached billions
The scrutiny arrives after in-kind transfers rapidly became a significant part of the plumbing behind US crypto investment products.
BlackRock’s iShares Bitcoin Trust ETF (IBIT) distributed about $5.49 billion of Bitcoin through in-kind redemptions during the first six months of 2026, according to its latest quarterly filing. Roughly $3.85 billion occurred during the second quarter.
Its iShares Ethereum Trust ETF (ETHA) distributed another $1.72 billion of Ethereum in kind through June, taking the combined total for the two BlackRock products to about $7.22 billion in six months.
IBIT also received about $9.36 billion of Bitcoin through in-kind creations over the period, reflecting how quickly direct crypto transfers between funds and authorized participants have expanded since the SEC abandoned the cash-only model.
Those transactions are not evidence that BlackRock is using the strategy Treasury identified.
IBIT and ETHA are treated as grantor trusts for federal income-tax purposes, meaning gains and losses pass through to shareholders rather than being subject to the RIC income test at the center of the IRS notice.
However, their activity shows the scale of the infrastructure now available to funds seeking to move crypto in kind.
Treasury’s concern applies to a separate category: RICs that obtain digital-asset exposure directly or through vehicles such as grantor trusts and then use redemptions to remove appreciated positions whose gains could otherwise complicate the 90% test.
That distinction could become more consequential as asset managers embed crypto exposure inside multi-asset, income and actively managed ETF strategies rather than relying solely on stand-alone Bitcoin or $ETH products.
Fund managers may face scrutiny before new rules arrive
Treasury has left itself several options for what comes next.
Notice 2026-62 says regulators could respond with regulations, revenue rulings or other guidance, and could potentially designate certain arrangements as transactions of interest or listed transactions, classifications that can bring heightened reporting requirements.
New guidance also would not necessarily apply only to future trades.
The agencies said any action could be prospective or, where their legal authority allows, retroactive to transactions completed before the guidance is issued. The IRS separately warned that it can challenge an abusive investment-fund strategy during an examination under existing law without waiting for a new rule.
That means managers using crypto-linked RIC structures may have to assess their exposure before Treasury decides whether to formalize a new standard.
Funds whose tax treatment depends on removing appreciated digital assets through redemption baskets could face pressure to document the economic purpose of those transactions, reconsider how baskets are constructed, or limit structures that rely on excluding those gains from the RIC income calculation.
For sponsors designing the next generation of crypto-linked ETFs, that uncertainty could become a product constraint. Structures that looked tax-efficient under existing interpretations may now require different portfolio mechanics, additional legal opinions, or a wider margin of safety before they reach the market.
