IRS Notice 2026-62 Flags Bitcoin (BTC) ETF Tax Maneuver With Retroactive Reach

Notice 2026-62 Targets In-Kind Redemptions

The US Internal Revenue Service put crypto-holding ETFs on notice on Monday, September 28, issuing a document that targets funds using in-kind redemptions to keep gains on digital assets off their own tax books. The mechanism at issue is structural. Under US fund tax rules, a registered fund enjoys pass-through status only if at least 90% of its income comes from dividends, interest, and gains on securities. Profits from cryptocurrencies and commodities do not count toward that threshold — too much of that income puts the tax treatment at risk. Some ETFs engineered a route around the limit: appreciating digital assets are handed to Wall Street trading firms in exchange for fund shares, a transfer that under an existing rule books no taxable gain. No booked gain means no disqualifying income. The text of Notice 2026-62 states that this works whether a fund owns the assets directly, holds them through trust or custody arrangements — including institutional cold wallet storage — or routes them through an intermediary. The notice names no funds, and the exposure map is narrower than the alarm suggests. Spot Bitcoin (BTC) products built as grantor trusts sit outside the target zone: the iShares Bitcoin Trust, BlackRock's spot Bitcoin ETF, passes its tax attributes through to shareholders, as its periodic filing with the SEC confirms. The risk instead sits with conventional funds that hold cryptocurrency, or shares of such trusts, on their own books, while funds holding these assets through an offshore subsidiary fall outside the notice's scope. ETF analysts flagged how broad the language is: James Seyffart wrote that the document targets several specific uses of in-kind redemptions to manufacture or defer tax outcomes, including 351 exchanges, box-spread strategies and straddles — derivatives constructions far removed from a directional bet such as a perpetual contract.

Revenue Ruling 2026-20 Ends Section 351

The warning arrived alongside a second, harder-edged action: Revenue Ruling 2026-20, published the same day, kills the Section 351 conversion. That technique let wealthy investors swap appreciated stock into a diversified fund without triggering capital gains tax. In the fact pattern the ruling addresses, an investor contributed a fast-rising share to a newly created ETF; the fund then passed that same stock to a trading firm through an in-kind redemption. The IRS now treats that handoff as a taxable sale, closing the swap that had made stock-to-ETF conversions effectively tax-free. For years the conversion was a quiet fixture of portfolio planning: an investor locked in diversification while deferring recognition of gains that, once routed through the fund's redemption machinery, never appeared as income anywhere. Eric Balchunas, an ETF analyst, characterized the move as a crackdown on structures that depart from the spirit of the law, and practitioners are being told to review past client conversions — a sign the ruling reaches backward into completed deals. Resistance was already organized: the Investment Company Institute, the main US fund trade group, had pressed Treasury to preserve conversions, arguing they deliver diversification and lower fees. The scope question matters for crypto investors too. The IRS's language reaches digital assets held directly or through trusts — a definition broad enough, in principle, to cover tokens that move across cross-chain bridges as well as plain Bitcoin holdings. The notice adds a sting: any eventual guidance could apply prospectively only, or retroactively to transactions that have already taken place. Comments are due October 28, giving fund sponsors and their counsel a month to argue for narrower treatment before the IRS finalizes its position. Readers tracking the market in real time can follow live spot and futures prices on Binance.

Retroactive Reach Is the Real Risk

Read as primary documents rather than headlines, the two texts carry different legal weight. Revenue Ruling 2026-20 is final authority and applies now; Notice 2026-62 is a proposal-stage signal — an invitation to comment ahead of the October 28 deadline, with retroactivity left explicitly open. For funds holding Bitcoin and other digital assets on their own books, the instruction is to re-price in-kind redemption structures before the IRS does. Gains manufactured through these mechanics will no longer stay off the books, whether the market is grinding through a bear market or a full-throttle rally.