Treasury and IRS flag crypto ETF in-kind tax strategies as $7B flows through BlackRock funds

The Treasury Department and IRS put digital assets on notice over tax-motivated ETF strategies on September 28, the same week that BlackRock’s two crypto trusts disclosed about $7.22 billion in in-kind distributions for the first half of 2026.

Notice 2026-62 identifies digital assets as an area where fund managers may be stretching tax provisions beyond their intended purpose, particularly in-kind redemption strategies used by regulated investment companies. The agencies said any resulting rules could be prospective or, where their legal authority allows, retroactive to transactions already completed. A companion Revenue Ruling 2026-20 rejects prearranged Section 351 transactions in which investors contribute appreciated securities to an ETF and quickly redeem, exiting with a different portfolio without initially recognizing the embedded gain.

Treasury Secretary Scott Bessent announced the guidance on X, saying the agencies were serious about cracking down on transactions designed to dodge taxes or exploit the federal tax code. “Our message on these conversions is clear: they don’t work under existing law,” he wrote.

The scale of the plumbing in question

BlackRock’s iShares Bitcoin Trust ETF (IBIT) distributed about $5.49 billion of Bitcoin through in-kind redemptions in the first six months of 2026, with roughly $3.85 billion of that in the second quarter, according to its quarterly filing. The iShares Ethereum Trust ETF (ETHA) distributed another $1.72 billion of Ethereum in kind through June, its own filing shows, bringing the two products to about $7.22 billion combined. IBIT also received about $9.36 billion of Bitcoin through in-kind creations over the same period.

That traffic has grown quickly since the Securities and Exchange Commission approved in-kind creations and redemptions for spot crypto exchange-traded products in 2025, replacing the cash-only model on efficiency grounds. Bitcoin traded near $83,932 on October 1, according to CoinGecko market data.

What the notice actually reaches

IBIT and ETHA are grantor trusts for federal income-tax purposes, so the RIC income test at the center of the notice does not apply to them. The $7.22 billion figure shows the scale of the in-kind infrastructure now exposed to any rule change, not that either trust is under investigation. Regulated investment companies generally must derive at least 90% of annual gross income from qualifying sources to keep favorable tax treatment, and Section 852(b)(6) lets ETFs distribute appreciated property during qualifying redemptions without recognizing the embedded gain.

The notice is not a ban. The agencies have requested information on the practice and are weighing regulations, further revenue rulings, or designation of certain arrangements as transactions of interest or listed transactions, classifications that carry heightened reporting requirements. The IRS also warned it can challenge an abusive investment-fund strategy during an examination under existing law, before any new rule is written.