The Treasury Department and IRS flagged digital assets as an area where fund managers may be stretching tax provisions beyond their intended purpose, warning in Notice 2026-62 that any resulting rules could apply retroactively.
The notice, issued September 28, targets strategies built around in-kind redemptions by regulated investment companies, the fund structure that lets ETFs hand investors appreciated property without recognizing the embedded gain. A companion Revenue Ruling 2026-20 goes further and rejects prearranged Section 351 transactions in which investors contribute appreciated securities to an ETF and quickly redeem out with a different portfolio, never booking the gain.
Treasury Secretary Scott Bessent announced both documents in a post on X. “Our message on these conversions is clear: they don’t work under existing law,” he said. He wrote that Treasury is serious about cracking down on transactions designed to dodge taxes or exploit the federal tax code.
The warning lands as in-kind transfers have become the standard plumbing of US spot crypto funds. The SEC approved in-kind creations and redemptions for spot crypto exchange-traded products last year, replacing the cash-only model on the grounds that direct asset transfers cut costs and price slippage.
The scale is large. BlackRock’s IBIT (iShares Bitcoin Trust ETF) distributed about $5.49 billion of Bitcoin through in-kind redemptions in the first six months of 2026, roughly $3.85 billion of it in the second quarter, per its quarterly filing, and received about $9.36 billion in kind over the same period. Its ETHA (iShares Ethereum Trust ETF) distributed another $1.72 billion of Ethereum through June, taking the two products to about $7.22 billion combined in six months.
Those figures show the size of the infrastructure exposed to any rule change, not that the flagged strategy is in use: IBIT and ETHA are grantor trusts for federal income-tax purposes, so the RIC income test at the center of the notice does not apply to them. Whether any fund actually uses the strategy is not established.
The notice is not a ban. It requests information on the practice and lists possible responses: new regulations, revenue rulings or other guidance, or designation of certain arrangements as transactions of interest or listed transactions, classifications that carry heightened reporting requirements. The agencies said any action could be prospective or, where their legal authority allows, retroactive to transactions completed before guidance is issued. The IRS also said it can challenge an abusive strategy during an examination under existing law, without waiting for a new rule.
