IRS Puts Crypto ETFs Under Pressure With New Tax Rules
The IRS is focusing on ETF structures that pass crypto through in kind, with possible consequences for funds and trusts like BlackRock’s iShares Bitcoin Trust.
Key Takeaways
- The IRS is warning about crypto ETFs that pass digital assets in kind to trading firms, which could leave gains untaxed.
- The new notice appears to mainly affect regular funds that hold crypto or trust shares; Spot Bitcoin ETFs like BlackRock’s are structured differently.
- The regulator is not ruling out retroactive application and is accepting responses to the notice until October 28.
The U.S. tax agency IRS has put crypto ETFs in its sights. In a new notice, the agency warns about funds that pass digital assets to trading firms through a setup that keeps gains off the books. On the same day, the IRS also shut down a tax-free stock swap for wealthy investors, showing that the regulator wants to apply the same ETF rule more strictly.
How the Trick Works
The core issue is the way some funds settle their positions. Instead of selling on the market, they transfer rising digital assets in kind to a trading firm that swaps them for ETF shares. That means the fund does not have to book a taxable gain under the current rule.
For ordinary U.S. funds, that matters because they only keep their tax status if at least 90 percent of their income comes from dividends, interest, and stock gains. Gains on crypto and commodities do not count toward that. According to the IRS, that setup can work with direct asset holdings, but also when a fund invests through a trust.
Which Funds Could Be Hit
The IRS does not name specific funds, but the warning appears to mainly target regular funds that hold crypto, or shares of such trusts. Spot Bitcoin ETFs, like BlackRock’s Bitcoin ETF, are set up differently. The iShares Bitcoin Trust is a grantor trust and passes its tax characteristics through to shareholders, according to the fund’s SEC filings.
That distinction matters now that the market has been debating for some time how far the tax and legal room for crypto ETFs really goes. In practice, even a small change in structure can have major consequences for a fund’s tax treatment.
Funds that hold crypto through an offshore subsidiary are outside this notice. The regulator does warn that any new guidance could possibly apply retroactively. Responses to the notice are welcome until October 28.
Broader Signal for the Market
For European crypto followers, this is mainly relevant because the US is once again showing how quickly tax rules around crypto investment products can shift. The IRS has treated digital assets as property for some time now, which means every sale, trade, or swap is basically a taxable event. That makes the tax setup of ETFs and trusts an important part of market structure, especially now that regulators are demanding more transparency around crypto transactions.
