The Treasury Department and the Internal Revenue Service have opened a review of a tax strategy used by crypto-linked ETFs, identifying digital assets as an area where fund managers may be stretching tax provisions beyond their intended purpose and opening the door to new rules or enforcement.

In Notice 2026-62, the agencies zero in on regulated investment companies that hold commodities or digital assets, directly or through a grantor trust, and use in-kind redemptions to remove appreciated positions without recognizing embedded gains. Treasury Secretary Scott Bessent said on X that the agencies were "serious about cracking down on transactions designed to dodge taxes or exploit our federal tax code," framing the notice as part of a broader campaign against tax-motivated investment strategies.

The scrutiny lands on a market that has rapidly adopted the in-kind machinery long standard in traditional funds. In 2025, the Securities and Exchange Commission approved in-kind creations and redemptions for spot Bitcoin and Ethereum exchange-traded products, ending the cash-only creation model and allowing authorized participants to move coins directly with funds.

The infrastructure built since then is substantial. BlackRock's iShares Bitcoin Trust ETF (IBIT) distributed approximately $5.49 billion of Bitcoin through in-kind redemptions during the first six months of 2026, according to its latest 10-Q filing with the SEC, with roughly $3.85 billion of that occurring in the second quarter. Its iShares Ethereum Trust ETF (ETHA) distributed another $1.72 billion of Ether in kind over the same period, bringing the combined total for the two products to about $7.22 billion in six months. IBIT also received approximately $9.36 billion of Bitcoin through in-kind creations during the period.

Those figures are not evidence that BlackRock employs the strategy Treasury identified. IBIT and ETHA are treated as grantor trusts for federal income-tax purposes, so gains and losses pass through to shareholders rather than being tested under the RIC rules at the center of the notice. But the activity demonstrates the scale of transfer infrastructure now available to any fund seeking to move crypto in kind.

The 90% test at issue

The dispute turns on the income test governing regulated investment companies. To preserve favorable tax treatment, a RIC must generally derive at least 90% of its annual gross income from qualifying sources, including dividends, interest and gains from stocks, securities and certain currencies.

Treasury said some ETFs holding commodities or digital assets argue they can keep gains from assets outside those qualifying categories out of the calculation entirely. Under Section 852(b)(6), ETFs can distribute appreciated property during qualifying redemptions without recognizing the embedded gain. Some funds contend that this unrecognized gain should also be excluded when testing whether they satisfy the 90% threshold.

Treasury signaled clear skepticism. The agency said the approach could allow an ETF to limit the income subject to the threshold regardless of its actual economic income. The notice does not ban the practice; the government has requested information on it and is weighing what action, if any, should follow.

The treatment contrasts with a related strategy named in the same sweep. Revenue Ruling 2026-20 rejects certain prearranged transactions in which investors contribute appreciated securities to an ETF under Section 351 and quickly withdraw assets through redemptions, exiting with a different portfolio without initially recognizing gains. The IRS said those arrangements can be recharacterized as taxable exchanges, a more advanced stage of enforcement than the digital-asset issue flagged in the notice. Bessent was categorical on this point, saying the transactions "don't work under existing law."

Operational consequences for sponsors

Treasury's concern applies to a distinct category: RICs that obtain digital-asset exposure directly or through vehicles such as grantor trusts and then use redemption baskets to strip out appreciated positions whose gains would otherwise jeopardize the income test. That distinction grows more consequential as asset managers embed crypto inside multi-asset, income and actively managed ETF strategies rather than relying on stand-alone Bitcoin or Ether products.

The agencies have preserved several options. Notice 2026-62 says regulators could respond with regulations, revenue rulings or other guidance, and could designate certain arrangements as transactions of interest or listed transactions — classifications that carry heightened reporting requirements. Any action could be prospective or, where legal authority allows, retroactive to transactions completed before 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 leaves fund managers with exposure assessments to complete before Treasury formalizes any standard. Funds whose tax treatment depends on removing appreciated digital assets through redemption baskets may need to document the economic purpose of those transactions, revise how baskets are constructed, or abandon structures that rely on excluding such gains from the RIC income calculation. For sponsors designing the next generation of crypto-linked ETFs, structures that looked tax-efficient under existing interpretations may now require different portfolio mechanics, additional legal opinions, or a wider margin of safety before launch.