The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have launched heightened scrutiny into tax strategies utilized by digital asset-linked exchange-traded funds (ETFs), targeting fund structures designed to bypass capital gains taxes. Treasury Secretary Scott Bessent confirmed the regulatory push on X, stating that federal agencies are active in "cracking down on transactions designed to dodge taxes or exploit our federal tax code."
Key Takeaways
- Notice 2026-62 targets Regulated Investment Companies (RICs) that use in-kind redemptions to bypass the 90% gross income compliance test.
- BlackRock's iShares Bitcoin Trust ETF (IBIT) and iShares Ethereum Trust ETF (ETHA) completed $7.22 billion in combined in-kind redemptions during the first six months of 2026.
- Revenue Ruling 2026-20 officially rejects prearranged Section 351 conversion transactions, labeling them taxable exchanges.
- Regulators warned that forthcoming rules could apply retroactively to completed trades.
The 90% Income Test and Redemption Mechanics
At the center of the regulatory inquiry is the income rule governing Regulated Investment Companies (RICs). To preserve favorable tax status, a RIC must derive at least 90% of its annual gross income from qualifying sources such as interest, dividends, and gains from traditional securities. Some fund managers holding digital assets or commodities contend that appreciated positions removed via in-kind redemptions under Section 852(b)(6) can be omitted entirely from the 90% income calculation.
Treasury expressed strong skepticism toward this interpretation, noting that it allows funds to limit income subject to the threshold regardless of economic gains. The scrutiny expands on recent actions, such as when the IRS targeted crypto ETF tax loopholes through Revenue Ruling 2026-20, which declared that prearranged Section 351 asset contributions and rapid redemptions do not shield investors from taxable exchanges under existing law.
Billion-Dollar Scale of In-Kind Crypto Infrastructure
The Treasury announcement comes as in-kind redemption mechanics become central to institutional crypto product infrastructure. BlackRock's IBIT distributed $5.49 billion worth of Bitcoin in kind during the first six months of 2026, with $3.85 billion occurring in the second quarter. During the same period, IBIT received $9.36 billion of Bitcoin via in-kind creations.
Concurrently, the iShares Ethereum Trust ETF (ETHA) distributed $1.72 billion of Ethereum through in-kind redemptions, bringing the total in-kind distributions across both BlackRock funds to $7.22 billion over six months. While IBIT and ETHA operate as grantor trusts rather than RICs—meaning gains pass directly to shareholders without triggering the 90% test—their figures illustrate the massive scale of the underlying redemption machinery now facing regulatory evaluation.
Why It Matters
This crackdown highlights growing friction as traditional ETF tax optimizations are transplanted into multi-asset and actively managed crypto products. If the IRS restricts RICs from excluding in-kind gains, fund sponsors attempting to incorporate digital assets alongside traditional securities will face complex compliance hurdles and potential retroactively applied tax liabilities. As asset managers expand beyond single-asset grantor trusts into active hybrid funds, regulatory clarity around Section 852(b)(6) will directly dictate product design and institutional adoption.
