IRS Reviewed Crypto ETF Redemption Tax Rules

Investors in digital asset ETFs should note that authorities are scrutinizing how fund redemptions impact tax eligibility.

Updated on Sept. 29, 2026 in Investing

Bold flat-color editorial illustration showing a stone plinth holding metallic geometric forms, representing institutional oversight of crypto tax policy. — The IRS and Treasury are reviewing the tax treatment of crypto ETF redemptions, a move that could affect the long-term tax status of digital asset funds. AI Illustration. Upload story photo >

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Should the government restrict how investment funds use in-kind redemptions to avoid taxes?

The Treasury Department and IRS are reviewing the tax treatment of in-kind redemptions for crypto exchange-traded funds. This review concerns how these transactions, which reached $7.22 billion in the first half of 2026, interact with specific income tests.

Why it matters

The review could change how these funds maintain their tax status, potentially impacting long-term fund performance for investors. Regulators are examining whether gains from these asset transfers should count toward the 90% gross-income test required for regulated investment companies.

The iShares Bitcoin Trust ETF and iShares Ethereum Trust ETF recorded a combined $7.22 billion in in-kind redemptions through June 30, 2026. Regulators are currently assessing these against the 90% gross-income test threshold for investment companies.

The players

IRS

The federal agency responsible for tax collection and the enforcement of tax laws for American households.

Treasury Department

The executive department responsible for managing government revenue and overseeing national financial policy.

iShares Bitcoin Trust ETF

A financial product managed by BlackRock that provides investors with exposure to Bitcoin price movements.

iShares Ethereum Trust ETF

An exchange-traded fund that tracks the price of Ether and provides digital asset exposure to retail portfolios.

The details

In-kind redemptions allow ETFs to deliver digital assets directly to authorized participants instead of cash, a process that can avoid capital gains recognition at the fund level. The IRS and Treasury are now questioning if these avoided gains should count toward the 90% income test. If these transactions are reclassified as taxable exchanges under Revenue Ruling 2026-20, it could disrupt the established tax advantages for these regulated funds.

July 29, 2025: The SEC approved in-kind creations and redemptions for crypto products.
June 30, 2026: The six-month period for $7.22 billion in redemptions concluded.
October 28, 2026: The deadline for submitting written comments to the IRS regarding the tax treatment of digital assets.

Money Landscape

This review tests the application of the 90% gross-income test for regulated investment companies against modern digital-asset vehicles. It follows a period of rapid growth in crypto ETF adoption since the SEC approved in-kind trading models.

While this is a regulatory review at the fund level, investors should monitor how potential changes affect the tax efficiency of their crypto ETF holdings. Consult a qualified tax professional to understand if these fund-level changes could impact your specific tax reporting.

The takeaway

The IRS is currently re-evaluating whether in-kind crypto redemptions undermine the tax-advantaged status of certain exchange-traded funds. Investors should monitor Notice 2026-62 for future guidance that may impact the tax profile of their digital asset holdings.