IRS Released New Tax Rules for ETF Transactions
New guidance clarifies which in-kind contributions for exchange-traded funds qualify for tax advantages.
Updated on Sept. 29, 2026 in Investing
Live Poll
Do you believe current tax regulations on investment funds protect your long-term financial interests?
The Internal Revenue Service issued Revenue Ruling 2026-20 and Notice 2026-62 to regulate how exchange-traded funds (ETFs) manage in-kind asset transfers. These rules clarify which transactions qualify for tax treatment for investors and fund participants.
Why it matters
The IRS aims to curb the use of ETFs as conduits for transferring securities between investors and authorized participants that do not align with an fund's stated investment thesis. By defining permissible transactions, the agency is limiting the scope of tax-advantaged portfolio exchanges.
The IRS issued two new regulatory documents, Revenue Ruling 2026-20 and Notice 2026-62, to govern in-kind contributions. These rules specifically address novel tax-aware strategies compared to existing tax standards under Section 351.
The players
Internal Revenue Service
The federal agency responsible for tax collection, rule enforcement, and providing regulatory guidance to households and investors.
The details
Under the new ruling, contributions where investors exchange appreciated portfolios for shares of an ETF with a different investment strategy are now prohibited. The guidance specifically targets transactions involving mixed straddles, foreign currency forward contracts, and selective swap terminations to prevent nonqualifying income. The IRS is now reviewing these complex strategies to determine if they should be classified as reportable transactions.
Timeline
July 2026: A WTSA meeting took place to discuss novel ETF transactions.
September 29, 2026: The IRS released Revenue Ruling 2026-20 and Notice 2026-62.
October 28, 2026: This is the deadline for the public to submit comments to the IRS.
Money Landscape
This guidance marks a tightening of tax regulations surrounding complex exchange-traded fund structures. It follows the precedent established by the Internal Revenue Code Section 351 and clarifies how those rules apply to modern, tax-aware investment products.
Investors who use ETFs for tax-aware strategies should review how these new restrictions impact their fund portfolio holdings. Because the tax treatment of in-kind contributions is shifting, discuss your current tax-aware investment strategies with a qualified tax professional.
The takeaway
The IRS is actively scrutinizing the ways ETFs are used to shift assets, specifically targeting strategies that fall outside of a fund's core investment thesis. Investors should monitor how their fund managers adjust to these rules and check for any future updates regarding listed transactions.
What happens next
The public comment period for these new IRS guidelines concludes on October 28, 2026.
Further reading
Learn more about the fundamentals of tax-efficient fund management in our Investing section.
Source note: This article includes information reported by Investmentlawwatch.
Live Poll
Do you believe current tax regulations on investment funds protect your long-term financial interests?
