U.S. IRS Drops Tax Bomb on Crypto ETFs..."Caught Using Tax-Exempt Asset Transfers"

▲ Bitcoin (BTC), Ethereum (ETH), XRP (XRP), IRS/ChatGPT Generated Image

The U.S. Internal Revenue Service (IRS) has initiated full-scale tax investigations and strengthened regulations targeting cryptocurrency funds that have excluded taxable profits from their books by utilizing the tax-exempt asset transfer methods of Exchange Traded Funds (ETFs). This move is seen as a crackdown on the practice of tax avoidance through spot transactions with Wall Street brokerage firms, despite the fact that capital gains from commodities or virtual assets are not included in qualified income, which is a requirement for a fund's tax-exempt status.

According to BeInCrypto, a virtual asset specialized media outlet, on September 28 (local time), the U.S. IRS announced guidance (Notice 2026-62) targeting funds that hold digital assets and have evaded reporting capital gains through irregular trading techniques. Most U.S. registered funds are exempt from corporate income tax when more than 90% of their total income consists of qualified income such as dividends, interest, and stock trading gains. However, profits from cryptocurrencies and commodity products are not recognized as qualified income, posing a risk that the fund's eligibility for tax benefits may be revoked as the proportion of virtual assets increases.

The IRS pointed out that some cryptocurrency funds have used sophisticated bypasses to circumvent the law. This structure involves transferring virtual assets whose prices have surged within the fund to Wall Street trading brokerage firms without formally selling them on the books, and then having these brokerage firms repurchase the fund's holdings for cash. This exploits a provision in current U.S. ETF regulations that does not require capital gains arising from asset transfers to be reflected on the books, effectively erasing potentially problematic income for tax purposes. The IRS warned that it would apply the same regulatory standards regardless of whether funds hold cryptocurrencies directly or indirectly through trusts.

However, Bitcoin spot ETFs, which have become mainstream in the market, appear to be exempt from this tax risk. This is because major Bitcoin spot ETFs, such as BlackRock's (BLK) iShares Bitcoin Trust (IBIT), are designed with a 'Grantor Trust' structure where the tax payment obligation is directly attributed to the investors, not the fund itself. Furthermore, funds that manage virtual assets through offshore foreign subsidiaries are also excluded from the direct application of this guidance.

The problem lies with other cryptocurrency funds that directly hold virtual assets or related trust shares under a general registered fund structure. The IRS heightened market tension by warning that the regulatory guidance, once finalized, could be applied retroactively not only to future transactions but also to asset transfer transactions already concluded in the past. The IRS plans to collect public comments until October 28.

On the same day, the IRS also simultaneously announced a tax ruling (Revenue Ruling 2026-20) that blocks Section 351, a provision high-net-worth individuals used to evade taxes by exchanging stocks tax-free, thereby narrowing the overall tax evasion loophole on Wall Street. As the tax authority's sharp blade targets the entire structure of cryptocurrency funds, including altcoins, the future restructuring of financial investment products and tax risk management are emerging as new turning points in the financial investment industry.

[Article Key Summary]

-The U.S. IRS has announced regulatory guidance targeting cryptocurrency funds that have omitted capital gains from their books by utilizing tax-exempt spot transfers.

-Although virtual asset gains are excluded from the 90% qualified income requirement, funds have maintained corporate tax exemption through irregular transactions via Wall Street brokerage firms.

-Bitcoin spot ETFs based on grantor trusts, such as IBIT, are excluded, but a risk of retroactive application to past transactions has been raised for general funds.

*Disclaimer: This article is for investment reference only, and we are not responsible for any investment losses based on it. The content should be interpreted for informational purposes only.*