- Treasury and the IRS issued Revenue Ruling 2026-20 and Notice 2026-62 on September 28, 2026.
- The guidance targets preplanned ETF transactions that rapidly replace appreciated securities without immediately recognizing built-in gains.
- Public comments on the notice are due October 28, 2026; ordinary ETF operations are not the stated target.
Treasury Secretary Scott Bessent backed an IRS revenue ruling targeting ETF transactions that can shift appreciated securities into a different portfolio without immediately recognizing built-in gains. Treasury and the IRS issued the ruling and a companion notice on September 28, 2026.
The ruling is Revenue Ruling 2026-20. The related notice is Notice 2026-62.
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Bessent said the government would challenge transactions designed to exploit tax rules. He stated, “Our message on these conversions is clear: they don’t work under existing law.”
The agencies focused on arrangements that use ETF creation and redemption mechanics as part of a preplanned tax strategy. Ordinary fund activity remains outside the stated target.
The ruling targets a rapid reshuffling after investors seed a new fund
Section 351 generally allows property to move to a corporation in exchange for stock without immediate gain recognition, provided the transaction meets the law’s conditions. The ETF strategy applies that principle to appreciated holdings.
An investor contributes a basket of securities to a newly formed ETF, sometimes through an intermediary. Those assets may have risen in value substantially.
The fund then rapidly distributes or swaps securities. The investor ends up with a “materially different” portfolio, while the original embedded gain has not been taxed.
That sequence is central to the government’s concern. Officials signaled that transactions carried out “shortly after” securities enter the fund warrant particular scrutiny.
The IRS described some arrangements as a “mere conduit” for moving securities in a way that avoids tax. The scrutiny is directed at the coordinated transaction, not simply the fact that an investor contributes assets to an ETF.
Existing ETF tax rules remain in place for ordinary fund operations
ETFs can often defer capital gains within a fund. In certain in-kind redemption transactions, the fund does not immediately recognize gain under Internal Revenue Code Section 852(b)(6).
That established feature is distinct from a prearranged plan to contribute appreciated securities and quickly replace them with different holdings. The notice says standard ETF seeding and normal in-kind mechanics are not the target when they serve ordinary fund operations.
The guidance leaves room for seeding with assets that fit a fund’s investment thesis and are intended to remain in the portfolio. That treatment can change if circumstances substantially change.
Fund managers therefore face a fact-specific boundary. The speed of a post-contribution shift is one warning sign, but the notice also describes the intended role and later treatment of contributed assets.
The agencies’ action addresses strategies that had allowed investors to defer capital gains while maintaining market exposure through a new fund wrapper. It does not announce that all ETF contributions or in-kind redemptions trigger tax.
The notice also names partnership, options and timing strategies
The notice reaches beyond the basic ETF structure. It flags certain Section 721 partnership exchange-fund variations and transfers to partnerships connected to Section 351 transactions.
It also identifies box spread strategies involving options and fund transactions timed around dividend record dates. The notice groups these with other “tax-motivated investment strategies.”
Another area involves structures using commodities or digital assets. The concern described in the guidance is whether those arrangements seek to meet the 90% qualifying-income test through in-kind redemptions.
These examples point to a wider review of investment structures that combine fund rules with carefully timed transfers or exchanges. The notice identifies the strategies, while the ruling applies to the described ETF conversion arrangement.
Public comments remain open through October 28
As of October 3, 2026, Treasury and the IRS have issued formal guidance and signaled enforcement scrutiny. The notice still preserves room for compliant seeding and ordinary in-kind ETF operations.
The line between those operations and a tax-avoidance transaction depends on the facts, including how soon the fund changes contributed holdings and whether the assets fit its investment purpose. Wealthy investors and advisers who market these strategies are among those the crackdown targets.
The agencies requested public comments on the notice through October 28, 2026. That deadline leaves the guidance open to comment while the new ruling and notice set out the government’s current position.
