The IRS May Be Coming for Crypto ETFs Next: Which Funds Are at Risk?

The IRS has put crypto ETFs (exchange-traded funds) on notice. A notice issued Monday flags funds holding digital assets that use a trading trick to keep gains off their books. The same day, the IRS shut down a tax-free stock swap used by wealthy investors. Both moves target the same ETF rule. How Crypto ETFs Keep Gains Off the Books Most US funds get a special tax status. They pay no tax themselves, as long as at least 90% of their income comes from dividends, interest, and stock gains. Profits on crypto and commodities do not count. Too much of that income puts the tax break at risk. The IRS says some ETFs found a way around it. They hand rising digital assets to Wall Street trading firms that cash in fund shares. A rule lets ETFs make these hand-offs without booking a taxable gain. No booked gain means no bad income. The notice says this works whether the fund owns the assets directly or through a trust. Which Crypto Funds Are at Risk The notice names no funds. Spot Bitcoin ETFs such as BlackRocks Bitcoin ETF are built differently. The iShares Bitcoin Trust is a grantor trust that passes its tax attributes to shareholders, according to its SEC filing. The exposure sits with regular funds that hold crypto, or shares of such trusts. Funds that hold these assets through an offshore subsidiary fall outside the notice. The IRS warned that any fix could reach backward. Any such guidance could apply prospectively only or retroactively to transactions that already have taken place. Comments are due October 28. The IRS Also Shut a Tax-Free Stock Swap The warning came with Revenue Ruling 2026-20. It kills the Section 351 conversion, which let wealthy investors trade soaring stock for a diversified fund tax-free. Sounds like its just cracking down on ones that break from spirit of law, noted Eric Balchunas, an ETF expert. An investor invested in a new ETF. The fund then passed that stock to a trading firm. The IRS now calls it a taxable sale. ETF-tax-loophole-swap-diagram. Source: IRS Revenue Ruling 2026-20 Ed Zollars, a CPA who writes Current Federal Tax Developments, told advisers to review past client conversions. The Investment Company Institute (ICI), the main US fund trade group, told Treasury that conversions offer diversification and lower fees, according to law firm Liskow. Read the article at BeInCrypto