IRS Scrutinizes Crypto ETF Tax Strategy in 2026

The U.S. Treasury Department and the Internal Revenue Service on Monday, Sept. 28, 2026, released Notice 2026-62 alongside Revenue Ruling 2026-20 , a paired package that draws a hard line between ordinary ETF plumbing and tax-motivated structures that use in-kind redemptions to engineer outcomes Congress never designed. For crypto markets, the headline is not a ban on spot Bitcoin or Ether products — it is a warning aimed at regulated investment companies that hold digital assets and treat unrecognized in-kind gains as if they never counted toward the 90% qualifying-income test that preserves RIC tax treatment.

That warning lands after a year in which the Securities and Exchange Commission approved in-kind creations and redemptions for spot crypto exchange-traded products, and after BlackRock’s iShares Bitcoin Trust (IBIT) and iShares Ethereum Trust (ETHA) alone moved more than $7 billion of crypto out through in-kind redemptions in the first half of 2026, according to CryptoSlate . Those two products are grantor trusts, not RICs, so they sit outside the income-test fight. The notice still matters because the same in-kind rails now support a second generation of multi-asset and actively managed ETFs that do need RIC status — and those are exactly the vehicles Treasury flagged.

What Notice 2026-62 and Rev. Rul. 2026-20 actually say

Rev. Rul. 2026-20 settles one fact pattern with binding force. An investor contributes appreciated securities to a newly formed ETF intending to qualify under Section 351. As part of the same plan, the ETF issues creation units to an authorized participant for cash or thesis-aligned securities, then quickly redeems those units by distributing the investor’s original holdings under Section 852(b)(6). The investor ends up with a materially different portfolio; the authorized participant walks away with the low-basis securities. The IRS collapses the steps and treats the investor as having made a taxable exchange under Section 1001 with the authorized participant, not a tax-free contribution to the fund.

Notice 2026-62 widens the aperture. KPMG’s summary lists the structures under review: Section 351 conversions and partnership variations, box-spread ETFs, record-date dividend-stripping rotations between index ETFs, multi-position “tax-aware” derivative strategies, and — critical for digital assets — ETFs that hold commodities or crypto, directly or through grantor trusts, then use Section 852(b)(6) in-kind redemptions to keep nonqualifying gains out of the Section 851(b)(2) gross-income calculation.

Section 851(b)(2) generally requires a RIC to derive at least 90% of its annual gross income from dividends, interest, and gains on stocks, securities, and certain currencies. Digital-asset gains do not automatically sit in that bucket. Some managers have argued that when an ETF distributes appreciated crypto or commodity exposure in an in-kind redemption, Section 852(b)(6) not only prevents fund-level recognition but also keeps the economic gain outside the 90% test. Treasury’s notice signals that interpretation is under active scrutiny and may produce regulations, further rulings, or “transaction of interest” / listed-transaction designations — with possible retroactive effect where legal authority allows.

Why crypto ETF plumbing is suddenly in the crosshairs

The SEC’s shift from cash-only to in-kind creations and redemptions for spot crypto ETPs was sold as a market-structure upgrade: less slippage, tighter spreads, and the same create/redeem mechanics that equity ETFs have used for decades. Sponsors moved quickly. CryptoSlate reported that IBIT distributed about $5.49 billion of Bitcoin in kind in the first six months of 2026 — roughly $3.85 billion of that in the second quarter alone — while ETHA distributed about $1.72 billion of Ether, for a combined ~$7.22 billion. IBIT also received about $9.36 billion of Bitcoin through in-kind creations over the same stretch.

Those figures measure infrastructure scale, not an accusation against BlackRock. Grantor trusts pass gains and losses through to shareholders and do not live or die by the RIC 90% test. The notice’s digital-asset language targets a different design: a RIC that obtains crypto exposure — including via a grantor trust sleeve — and then leans on in-kind redemptions to scrub nonqualifying income from the qualification math. As product shelves expand beyond single-asset Bitcoin and Ether trusts into multi-asset, income, and actively managed wrappers, that distinction becomes the product-design bottleneck.

InvestmentNews notes that conventional practice was left alone. The agencies expressed no view on Section 351 seeding where contributed assets match the fund’s thesis and are expected to stay, and they did not attack routine create/redeem activity that keeps ETF shares trading near net asset value. The explicit carve-out for “conventional, long-established tax planning” is meant to calm ordinary ETF markets while still chilling the engineered cases.

How the RIC income-test play works in practice

In the pattern Treasury describes, a RIC holds nonqualifying assets such as commodities or digital assets. Those positions appreciate. Rather than sell into the market and book gains that could push the fund below the 90% qualifying-income threshold, the fund issues a creation unit to an authorized participant and satisfies the redemption with the appreciated nonqualifying asset under Section 852(b)(6). The fund asserts that because the gain was realized but not recognized for Subchapter C purposes, it also drops out of the Section 851(b)(2) gross-income denominator and numerator calculus.

If that reading holds, a RIC could manage around the income test irrespective of its true economic mix — a result Treasury says may be inconsistent with the purpose of the qualification rules. Current Federal Tax Developments frames Notice 2026-62 as a warning shot across atypical Section 852(b)(6) uses, while Rev. Rul. 2026-20 already converts one popular diversification play into a taxable exchange using substance-over-form and step-transaction doctrines.

The agencies have several tools left. They can write regulations, issue more revenue rulings, designate certain arrangements as transactions of interest or listed transactions (triggering Form 8886 / Form 8918 disclosure), or simply challenge positions on examination under existing law without waiting for new text. Any forthcoming guidance, the notice says, could apply prospectively or — where authority permits — retroactively. Comments are due by October 28, 2026.

What is not under attack — and what still is

Investors watching spot Bitcoin and Ether ETFs should separate three layers:

• Stand-alone grantor trusts such as IBIT and ETHA: their in-kind volume shows how large crypto ETF plumbing has become, but they are not the RIC income-test targets named in the notice.
• Routine create/redeem for ordinary ETF market-making: Treasury says it intends to respect conventional operations consistent with congressional intent.
• RIC wrappers with digital-asset sleeves that depend on excluding unrecognized in-kind gains from the 90% test: these are the structures under review and the ones sponsors may need to redesign or over-document before the comment window closes.

Rev. Rul. 2026-20 also kills a nearby equity strategy that had been marketed to advisors with concentrated low-basis holdings: the prearranged 351 conversion that swaps into a diversified ETF sleeve without recognizing gain. InvestmentNews reported that more than 100 ETFs have been seeded in-kind under Section 351 since 2021, representing more than $20 billion in launch AUM per a Tax Alpha Insider tracker — growth that made the IRS response more likely, not less.

Treasury Secretary Scott Bessent framed the package in blunt terms on X, saying the agencies are “serious about cracking down on transactions designed to dodge taxes or exploit our federal tax code,” according to CryptoSlate. That political signal sits alongside the technical notice: this is not a quiet footnote in the Internal Revenue Bulletin.

Product design and market implications for 2026

For crypto ETF sponsors, the practical question is whether next-generation products can still use RIC tax treatment while holding meaningful digital-asset exposure. Options that may get more attention: tighter basket construction that keeps nonqualifying income well below the edge cases; separate grantor-trust or commodity-pool vehicles instead of stuffing crypto into a RIC; additional legal opinions before launch; and wider haircuts on strategies whose economics depend on the contested exclusion.

Authorized participants and market makers should also expect more documentation around why a redemption basket includes a particular digital-asset position. If examiners later treat a redemption as part of a tax-motivated plan rather than ordinary liquidity management, the paper trail on economic purpose becomes the defense — or the liability. Retroactivity risk, even if limited, will push compliance teams to review H1 2026 and summer activity rather than wait for October 28.

The notice also arrives in a market that has already priced in regulatory whiplash. Spot Bitcoin ETFs swung from heavy outflows around the mid-September CLARITY Act cloture failure to multi-session inflow streaks later in the month, while Ether products often moved the other way. Tax plumbing is a quieter channel than Senate votes or Fed statements, but it can reshape which wrappers get launched, how much crypto can sit inside multi-asset funds, and whether “tax-aware” crypto exposure remains a growth category or a compliance headache.

What this means for investors

For holders of the large spot Bitcoin and Ether ETFs, Monday’s package is not a forced redemption event and does not, by itself, change how those grantor trusts are taxed at the shareholder level. The near-term signal is product-shelf risk: fewer aggressive RIC designs that lean on in-kind redemptions to manufacture qualifying-income ratios, more caution from issuers filing multi-asset crypto products, and a comment period that will decide how sharp the next round of rules becomes.

Investors evaluating new crypto-linked ETFs after Sept. 28 should ask a simple diligence question: does the fund’s tax story depend on treating unrecognized digital-asset gains as invisible for the RIC 90% test? If the answer is yes — or even “maybe, with counsel’s blessing” — that strategy now sits inside a published IRS scrutiny zone with a public comment deadline of October 28, 2026. Conventional create/redeem efficiency remains intact. Engineered income-test management does not.

The IRS did not outlaw crypto ETFs. It told the market which tax shortcuts it intends to close. In a year when in-kind crypto transfers already run to the billions, that distinction — between plumbing that keeps markets tight and structures that rewrite the RIC income test — is the story that will shape the next wave of filings.