The Treasury Department and Internal Revenue Service are scrutinizing a tax strategy employed by crypto exchange-traded products that use in-kind redemptions to exclude digital-asset gains from a critical income qualification test for regulated investment companies.
The structure allows ETF sponsors to distribute appreciated cryptocurrencies to shareholders without recognizing the embedded gain, potentially keeping those gains outside the 90% annual gross income threshold that RICs must meet to qualify for preferential tax treatment. Under Section 852(b)(6) of the tax code, ETFs can distribute appreciated property during qualifying redemptions without triggering immediate tax recognition.
Treasury Secretary Scott Bessent said the department is “serious about cracking down on transactions designed to dodge taxes or exploit our federal tax code.” He added that certain prearranged structures “don’t work under existing law,” referring specifically to Section 351 conversions.
Scale of In-Kind Activity
BlackRock’s iShares Bitcoin Trust ETF (IBIT) distributed $5.49 billion in Bitcoin through in-kind redemptions during the first six months of 2026. The fund received $9.36 billion in Bitcoin through in-kind creations over the same period. BlackRock’s iShares Ethereum Trust ETF (ETHA) distributed $1.72 billion in Ethereum in kind through June. Combined, the two products moved $7.22 billion in digital assets through in-kind mechanisms in the first half of 2026.
The SEC approved in-kind creations and redemptions for spot crypto exchange-traded products in the past year, citing potential cost reduction and price-slippage benefits for investors.
RIC Treatment and Grantor Trust Status
IBIT and ETHA are treated as grantor trusts for federal income-tax purposes, meaning gains and losses pass through to shareholders rather than being subject to the RIC income test. The 90% income threshold applies to RICs deriving annual gross income from qualifying sources including dividends, interest, and gains involving stocks, securities, and certain currencies.
Revenue Ruling 2026-20 rejected certain prearranged transactions in which investors contribute appreciated securities to an ETF before quickly removing those assets through redemptions, establishing a precedent for Treasury scrutiny of redemption-based tax avoidance.
Potential Treasury Actions
Treasury has not issued a formal ban but requested information from industry participants and is considering what regulatory response should follow. The department could respond with regulations, revenue rulings, additional guidance, or designate arrangements as transactions of interest or listed transactions. Any action could apply prospectively or retroactively to transactions completed before guidance is issued.
The SEC and Treasury have not clarified whether BlackRock’s IBIT and ETHA are themselves using the contested strategy or whether they merely demonstrate the scale of in-kind infrastructure available to other fund sponsors. Treasury also did not name specific fund managers or sponsors beyond BlackRock that may be employing the approach.
