IRS Takes Aim at Crypto and ETF Tax Engineering: Six Strategies, a $95,200 Example and Two Deadlines for US Investors

Six Strategies, Two Deadlines, One Tax Distinction

The IRS has put six fund strategies under scrutiny, and US crypto investors have two dates to track: October 28 and December 31. The September 28 action targets tax engineering. It does not impose a blanket new tax on crypto ETFs.

Treasury and the IRS simultaneously issued Notice 2026-62 and Revenue Ruling 2026-20. The notice describes emerging investment-fund structures whose claimed benefits may conflict with federal tax law’s purpose. The ruling rejects one specific ETF conversion under existing law.

Treasury Secretary Scott Bessent announced the documents on X, emphasizing enforcement against transactions engineered to evade tax and saying the targeted Section 351 conversions already fail under current law.

The Portfolio Swap the IRS Treats as Taxable

The investor in Revenue Ruling 2026-20 contributes an appreciated, diversified securities portfolio to a newly formed ETF, seeking tax deferral under Section 351.

That contribution is part of a larger plan. The ETF issues shares to an authorized participant, or AP, for different securities or cash. Shortly afterward, it redeems those shares by delivering the investor’s original securities to the AP, invoking Section 852(b)(6). The ETF finishes with a materially different portfolio.

The IRS joins those steps together using the step-transaction and substance-over-form doctrines. The ETF serves as a conduit: the investor has effectively exchanged appreciated securities with the AP. The result is a taxable exchange under Section 1001, rather than a tax-deferred Section 351 contribution.

The financial incentive is substantial. A $500,000 portfolio with $100,000 of basis contains $400,000 of gains. At the top 20% federal long-term capital-gains rate plus the 3.8% net investment income tax, the illustrative federal bill reaches $95,200. Yahoo Finance’s tax coverage explains the appeal of eliminating that embedded gain.

Section 852(b)(6) remains in force. The ruling targets a prearranged portfolio replacement, not ordinary qualifying in-kind ETF redemptions. Ashurst Perkins Coie’s analysis makes that boundary explicit.

The notice also leaves outside its scope normal ETF seeding with assets that fit the fund’s investment strategy and are expected to remain there long term. That exclusion is described in Ropes & Gray’s analysis.

Where Digital Assets Enter the Six-Strategy List

Notice 2026-62 covers six broad strategy groups:

1. Section 351 conversions: contribute appreciated securities, then use planned redemptions to replace the portfolio.
2. Section 721 exchange-fund variations: interpose a partnership to work around diversification requirements before an ETF conversion.
3. Box spread funds: use options and redemptions to seek returns without current recognition of the associated gains.
4. Record-date strategies: move fund holdings around dividend record dates to eliminate dividend income.
5. RIC income-test avoidance: attempt to exclude nonqualifying gains from the 90% qualifying-income calculation.
6. Tax-aware character conversion: combine Section 1092 straddles, Section 988 currency contracts or Section 1234A notional-principal-contract terminations to seek favorable differences between capital gains and ordinary losses.

The fifth category supplies the direct crypto connection. An ETF holds assets producing nonqualifying income, including commodities or digital assets, directly or through a grantor trust. It distributes those holdings in kind, claims Section 852(b)(6) prevents gain recognition, and argues the realized but unrecognized gain falls outside the RIC’s 90% qualifying-income test. Ropes & Gray explains the mechanism.

Treasury and the IRS are considering regulations and interpretive guidance, including possible transaction-of-interest or listed-transaction designations carrying additional disclosure obligations. Guidance can reach earlier transactions under the applicable Section 7805(b) authority. The IRS can also challenge transactions during examinations using existing law without waiting for another rule. These are stated enforcement options, not completed designations. The notice sets out those options.

IBIT’s $5.5 Billion Is Scale, Not an Accusation

BlackRock’s reported activity illustrates how large in-kind infrastructure has become. According to InsideBitcoins’ account of its filings, IBIT distributed approximately $5.5 billion in Bitcoin through in-kind redemptions during the first half of 2026, including roughly $3.85 billion in the second quarter, while receiving approximately $9.36 billion in kind.

Those figures do not establish use of a targeted strategy.

IBIT and ETHA are grantor trusts for federal income-tax purposes. Gains and losses pass through to shareholders. They are not subject to the RIC qualifying-income test addressed by this part of the notice. A RIC holding a grantor-trust investment and a fund that is itself a grantor trust occupy different tax positions.

No fund was named as using the identified strategies. Reading IBIT’s redemption totals as evidence that it was caught exploiting the RIC test would erase the central legal distinction. The numbers describe infrastructure, not an IRS allegation against BlackRock.

Three Concrete Actions for US Crypto Holders

1. Prepare for the December 31 Identification Deadline

Notice 2026-20 is a separate document from Revenue Ruling 2026-20. Issued March 18, it extends Notice 2025-7’s temporary identification relief through December 31, 2026. During that period, taxpayers can adequately identify broker-held digital-asset units in their own books and records without first communicating the selection to the broker. The IRS extension governs this relief.

Use that window to make your lot records explicit and establish how your broker will accept specific identification when the relief ends. Preserve the basis and acquisition information supporting each selection. The extension concerns the method of identifying units; it does not eliminate the need to identify them.

Without adequate identification, FIFO is the default under Treasury Regulation Section 1.1012-1(j)(3)(i). The earliest acquired units go first. EY’s explanation distinguishes the temporary books-and-records method from identification communicated to a broker.

2. Reconcile Form 1099-DA Against Your Records

Form 1099-DA gross-proceeds reporting began with 2025 digital-asset dispositions. The IRS form instructions describe the broker reporting framework.

The identification relief does not extend to the information-reporting rules under Section 1.6045-1. Consequently, acquisition dates and basis reported for 2026 transactions can differ from the units adequately identified in your own records. Notice 2026-20 expressly separates these two systems.

Reconcile proceeds, acquisition dates, basis and identified units across broker statements and your ledger. Keep the records explaining any difference. A broker’s reporting obligation and your valid tax-lot selection can produce different records for the same disposition.

3. Submit Comments by October 28

The public-comment deadline is October 28, 2026. Visit Regulations.gov, search IRS-2026-1255, and reference Notice 2026-62 in the submission’s subject line.

The alternative mailing address is: Internal Revenue Service, CC:PA:01:PR (Notice 2026-62), Room 5503, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. The notice supplies both submission routes.

That is the fund-guidance comment clock. December 31 is the separate digital-asset identification clock. Keeping the two documents and deadlines distinct prevents an ETF enforcement headline from obscuring an immediate recordkeeping task.

ETF Demand Keeps the Tax Structure Relevant

Recent Bitcoin quotes have ranged around $84,600–$86,531. Citi raised its 12-month target from $82,000 to $113,000, citing ETF inflows and expanding adviser and brokerage allocations. CoinShares’ August survey put digital-asset allocations at 1.2%, the first recovery since the October 2025 selloff. CryptoSlate’s market coverage describes that demand backdrop.

Crypto.news reported $2.39 billion in weekly ETF inflows, returning 2026 net flows to positive territory even as Bitcoin fell 4.3% and the 10-year Treasury yield rose from roughly 4.95% to 5.20%. Those inflows came over the five trading sessions from September 21 to 25, when Bitcoin fell to $83,500, according to Hilbert Group.

That demand makes fund structure consequential. For US holders, the useful distinction is between a challenged tax-engineering plan, a grantor trust’s actual tax treatment, and the records needed to support their own reported gains.