Internal Revenue Service Reviews Tax Strategy as Crypto ETF Redemptions Reach $7.2 Billion
Treasury and the IRS are examining whether some regulated investment companies are taking a position that in-kind redemptions keep digital-asset gains outside a 90% income test.
The Treasury Department and Internal Revenue Service (IRS) are reviewing whether some regulated investment companies are taking the position that in-kind redemptions keep digital-asset gains outside the 90% gross-income test required for favorable tax treatment.
The review coincides with more than $7 billion in in-kind crypto redemptions by two BlackRock products during the six months ended June 30, 2026. The iShares Bitcoin Trust ETF recorded $5.49 billion in Bitcoin (BTC) paid in kind for share redemptions, while the iShares Ethereum Trust ETF recorded $1.72 billion in Ether (ETH) redemptions.
The combined total was $7.22 billion. The filings show the scale of the redemption mechanism but do not establish that either fund used the tax treatment under review or that the products are subject to the regulated investment company income test described in Notice 2026-62.
The notice addresses funds that hold commodities or digital assets directly or through grantor trusts. Some take the position that gains avoided under Section 852(b)(6) do not count toward the 90% income test. That provision generally allows qualifying regulated investment companies to distribute appreciated property in redemptions without recognizing the embedded gain at the fund level.
An in-kind redemption occurs when an exchange-traded fund delivers assets such as Bitcoin or Ether instead of cash as authorized participants redeem large blocks of shares. The Securities and Exchange Commission approved in-kind creations and redemptions for crypto exchange-traded products on July 29, 2025, describing the structure as a way to improve flexibility, reduce costs and support more efficient markets.
Notice 2026-62 requests written comments by Oct. 28, 2026. Future guidance could apply prospectively or retroactively, subject to the agencies’ legal authority, and the IRS may challenge such arrangements under existing law.
Revenue Ruling 2026-20 separately treats certain prearranged transfers of appreciated securities into a newly formed ETF followed by quick redemptions as taxable exchanges rather than tax-deferred Section 351 contributions.
The review does not announce a ban or final rule covering the digital-asset structure, and it does not name a specific ETF, sponsor or transaction as violating the law. The next formal step is the Oct. 28 comment deadline.
