IRS Scrutinizes Crypto ETF Tax Strategy After $7.2B in Distributions

Treasury and the IRS are scrutinizing a tax strategy involving digital assets and regulated investment companies (RICs), which generally must earn at least 90% of annual gross income from qualifying sources to retain favorable tax treatment. The inquiry follows $7.22 billion in combined in-kind Bitcoin and Ethereum distributions by BlackRock’s IBIT and ETHA during the first six months of 2026, though the funds are not accused of using the strategy under review.

Why it matters

The agencies are examining whether some RICs can exclude unrealized gains from the 90% income test when they distribute appreciated digital assets through in-kind redemptions. Under Section 852(b)(6), qualifying ETF redemptions can generally transfer appreciated property without the fund recognizing the embedded gain. Treasury is skeptical that the unrecognized gain should therefore be left out of the RIC calculation, arguing that this interpretation could make the test depend less on a fund’s underlying economic income.

The notice requests information and does not ban the practice or establish a new rule. Regulators could issue regulations, rulings or other guidance, potentially with retroactive effect where legally permitted. The IRS also says it can challenge an abusive strategy under existing law before new guidance arrives.

Market impact

BlackRock’s IBIT distributed about $5.49 billion of Bitcoin in kind through June, while ETHA distributed $1.72 billion of Ethereum. IBIT also received about $9.36 billion through in-kind creations. Those figures illustrate the scale of crypto transfers, not evidence that either trust is using the strategy Treasury identified. Both are treated as grantor trusts, rather than RICs subject to the income test at issue.

The scrutiny instead raises uncertainty for RICs seeking digital-asset exposure through direct holdings or other structures. Fund managers may need to reassess redemption baskets, document their economic purpose and review tax assumptions as crypto exposure spreads into multi-asset and actively managed ETFs.