US Treasury and the IRS have put a popular crypto ETF tax structure on notice, warning that funds using in-kind redemptions to park appreciated digital assets outside a key income test could lose their tax treatment. Notice 2026-62, issued late September, names commodities and digital assets held directly or through grantor trusts as the focus of a review into regulated investment company practices.
The notice does not ban anything yet. It states that Treasury and the IRS are studying strategies, and that regulations or guidance may follow. Fund managers now have to weigh whether their redemption mechanics survive that review, and Treasury Secretary Scott Bessent has signaled a broader push against structures built to dodge taxable gains.
How the strategy works
Most ETFs are taxed as regulated investment companies under subchapter M. To keep that status, a fund must pass the 90% income test, meaning at least 90% of its gross income has to come from qualifying sources. Digital asset gains sit awkwardly next to that requirement.
Section 852(b)(6) gives ETFs an escape hatch. When an authorized participant redeems fund shares, the fund can distribute securities in kind instead of selling them. The embedded gain on those assets never gets recognized, so it never runs through the income test. For a Bitcoin fund sitting on large unrealized profits, that plumbing matters a lot.
Treasury’s concern is narrower than a general attack on ETF redemptions. The notice targets funds that use those transactions to achieve tax outcomes regulators say may bear little relationship to the fund’s actual economics, specifically RICs that take crypto exposure through grantor trusts and then use redemption baskets to remove appreciated positions.
$7.2 billion already moving in kind
The scale of in-kind activity in crypto funds is no longer theoretical. BlackRock’s iShares Bitcoin Trust moved roughly $5.49 billion of Bitcoin through in-kind redemptions and creations through June 2026, while its Ethereum fund ETHA handled about $1.72 billion. That is roughly $7.22 billion combined, per figures cited in industry reporting.
Those numbers do not prove BlackRock is running the strategy Treasury flagged. But they show the infrastructure exists at scale, and that any change to the rules would touch real money rather than a paper structure. IBIT alone holds more than $80 billion in assets, so even a fraction of its basket flowing through in-kind channels adds up quickly.
Why the 90% test matters so much
The RIC regime is the reason ETFs are attractive to investors in the first place. A qualifying fund pays no entity-level tax. It deducts dividends it distributes to shareholders, and those shareholders pay tax at their own rates. Lose that status and the fund itself becomes taxable, a hit that would show up directly in returns.
Digital assets complicate the picture because they produce gains rather than the dividend and interest income the test was written around. A fund holding Bitcoin through a grantor trust technically holds the asset itself, so realized gains from selling BTC would be income that does not fit the qualifying list. In-kind redemptions keep those gains off the books entirely, which is exactly the effect Treasury is questioning.
Treasury’s concern is narrower than a general attack on ETF redemptions. The notice targets funds that use those transactions to achieve tax outcomes regulators say may bear little relationship to the fund’s actual economics, specifically RICs that take crypto exposure through grantor trusts and then use redemption baskets to remove appreciated positions.
$7.2 billion already moving in kind
The scale of in-kind activity in crypto funds is no longer theoretical. BlackRock’s iShares Bitcoin Trust moved roughly $5.49 billion of Bitcoin through in-kind redemptions and creations through June 2026, while its Ethereum fund ETHA handled about $1.72 billion. That is roughly $7.22 billion combined, per figures cited in industry reporting.
Those numbers do not prove BlackRock is running the strategy Treasury flagged. But they show the infrastructure exists at scale, and that any change to the rules would touch real money rather than a paper structure. IBIT alone holds tens of billions in assets, so even a fraction of its basket flowing through in-kind channels adds up quickly.
The authorized participant model makes this hard to police. APs are large dealers who assemble creation baskets and redeem them for shares they can sell on exchange. When a fund hands back appreciated Bitcoin instead of cash, the AP takes on the tax position, and the fund reports nothing. Tracing how much of that flow reflects genuine investor demand versus tax planning is exactly the sort of question the notice says the agencies are studying.
What happens next
The notice lists several practices under examination beyond crypto, including certain tax-deferred ETF seedings followed by in-kind redemptions, selective use of swaps and straddles, and strategies that defer income recognition from underlying ETF holdings. Comment from Cohen & Co, a fund tax practice, laid out the same list in July, and the final notice tracked those concerns closely.
For fund managers, the practical problem is timing. Treasury has not said when new rules arrive or whether they would apply retroactively. Managers using crypto-linked RIC structures may have to document the economic purpose of redemption transactions now, before a formal standard exists, or reconsider how their baskets are built.
“Treasury stopped short of challenging the conventional ETF redemptions. Instead, its concern centers on structures that use those transactions to achieve tax outcomes regulators say may bear little relationship to a fund’s underlying economics,” CryptoSlate reported in its review of the notice.
The market angle is straightforward. A fund that loses RIC status would face taxation at the fund level, an outcome that would force restructuring or liquidation. Forced redemptions of appreciated crypto holdings could also add selling pressure in weak markets. Analysts at CoinAlert News noted the uncertainty alone favors cautious positioning until Treasury publishes follow-up guidance.
The wider backdrop is a year of tightening scrutiny of crypto fund structures. The IRS has already tightened reporting on digital asset brokers, and the ETF industry has grown fast enough that tax planners built multi-billion dollar flows on interpretations Treasury now wants to test. Roughly $3 billion flowed into US spot crypto ETFs over nine days earlier this week, so the stakes keep rising with the asset base.
Issuers have options. Some could shift to structures that recognize gains and distribute them as ordinary dividends, which is simpler but less tax efficient for shareholders. Others may wait for guidance and keep documenting why their redemptions reflect genuine creation and redemption demand rather than tax engineering.
There is also a legislative route. Congress has shown interest in modernizing subchapter M for digital assets, and a statutory fix would outrank any notice. Nothing has advanced far enough to rely on, so managers are planning around administrative guidance for now.
Nothing in the notice changes how the funds trade today. What it changes is the risk calculus for anyone designing the next crypto ETF, and for managers whose current products depend on Section 852(b)(6) staying exactly as it is.