The IRS and Treasury Department have fired a warning shot concerning two exchange-traded fund strategies that can sharply cut wealthy investors’ tax liabilities – and those individuals should prepare to back up their reasoning for using those tactics.
Last week, the federal tax authority rolled out a pair of documents concerning these strategies.
The first was a revenue ruling on certain ETF conversions under Section 351 of the tax code – in particular a strategy in which a wealthy investor with a portfolio of highly appreciated stocks uses these holdings to create a new ETF, followed by an in-kind distribution of those assets without the recognition of capital gains.
The second was a notice from Treasury and the Internal Revenue Service, calling out “novel investment fund strategies” that aim to produce results that could be inconsistent with the proper application of the tax rules.
Strategies in the crosshairs include those that use straddles to produce capital gains and ordinary losses from offsetting positions. So-called no dividend strategies that aim to deliver returns tied to an index without recognizing income are also under scrutiny, according to an article from law firm Ropes & Gray. The tax authorities are seeking comments from the public by Oct. 28 on these methods. Any future guidance that rolls out related to these tax-aware funds may apply prospectively only or retroactively, according to the IRS’ notice.
“Assess the situation and understand what it means,” said Damien Martin, partner in the private tax and financial services organization at EY. “Have your eyes open, be aware and pay attention. This is a take stock type situation.”
Source: https://www.cnbc.com/2026/10/07/irs-is-eyeing-funds-that-aim-to-slash-taxes-what-may-be-next.html