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IRS Notice 2026-62: What the Crypto ETF Tax Crackdown Means for Investors

With Notice 2026-62, the IRS and Treasury have turned their attention to crypto ETF in-kind redemptions, alongside a companion revenue ruling. This guide explains what changed — and why it matters for investors.

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Last updated: October 2, 2026 · Reviewed by the CryptoTaxAI editorial team · 8 min read

In this guide
  1. What happened on September 28
  2. The mechanics, in plain English: in-kind redemptions and the 90% test
  3. What Revenue Ruling 2026-20 shut down
  4. Does this affect your spot crypto ETF?
  5. What to watch next: comments, guidance, retroactivity
  6. Your action checklist

Late September brought the biggest crypto-tax headline of 2026 — and it wasn't about your 1099-DA. The IRS and the Treasury Department put crypto-holding ETFs on notice over tax strategies built around in-kind redemptions, warning that any resulting guidance could apply retroactively. If you hold crypto through an ETF or fund, here's what the documents say, what they don't say yet, and what you should actually do about it.

1. What happened on September 28

On September 28, 2026, Treasury and the IRS released two documents at once:

  • Notice 2026-62, describing what it calls "novel investment fund strategies that purport to produce tax results that may be inconsistent with the purpose and proper application of the relevant federal tax rules." It names digital assets as one of the areas where fund managers may be stretching tax provisions beyond their intended purpose.
  • Revenue Ruling 2026-20, a companion ruling that rejects a specific prearranged transaction in which investors contributed appreciated securities to an ETF and quickly redeemed out with a different portfolio, never booking the gain.

The Treasury Secretary publicly announced both documents the same day, stating that the transactions in question "don't work under existing law" — a signal that the agencies are prepared to challenge these arrangements on examination, not just write future rules about them.

Notice 2026-62 is not a final regulation. It is a request for information and comments, with written comments due October 28, 2026 — after which Treasury and the IRS may issue guidance that could, the notice warns, apply prospectively only or retroactively to transactions that already took place.

2. The mechanics, in plain English: in-kind redemptions and the 90% test

To understand what the IRS is objecting to, you need two building blocks:

Block one: the 90% qualifying-income test. Most ETFs are structured as regulated investment companies (RICs). To keep that favorable tax status — under which the fund itself pays no entity-level tax — a RIC must derive at least 90% of its gross income from qualifying sources: dividends, interest, and capital gains on stocks and securities (Section 851(b)(2) of the tax code). Gains on crypto and commodities generally do not count as qualifying income.

Block two: in-kind redemptions. ETFs have a special mechanism that lets them hand appreciated property — securities, and now crypto — directly to authorized participants (large trading firms) when those firms redeem fund shares, without the fund recognizing the embedded gain at the fund level (Section 852(b)(6)). In-kind redemptions are also the standard plumbing that keeps ordinary ETFs tax-efficient; the SEC approved in-kind creations and redemptions for spot crypto exchange-traded products in 2025.

The IRS's concern is what happens when you combine the two: a fund holding non-qualifying assets (crypto or commodities) lets those assets appreciate, then distributes them to trading firms through in-kind redemptions — taking the position that the realized-but-unrecognized gains don't count against the 90% income test. Per tax analysis of the notice, the IRS views this chaining of Sections 351, 721, and 852(b)(6) as inconsistent with statutory intent. In plain terms: the agency believes some funds are using the redemption machinery to hold digital assets while dodging the income limit that was supposed to restrict exactly that.

3. What Revenue Ruling 2026-20 shut down

The companion ruling targets a different, harder-edged maneuver — the Section 351 conversion. In the fact pattern the IRS addressed, an investor contributed a fast-rising single stock to a newly created ETF, and the fund promptly passed that same stock to a trading firm through an in-kind redemption. The investor ended up diversified — holding fund shares instead of one concentrated stock — without ever triggering capital gains tax.

Revenue Ruling 2026-20 rejects that outcome: the IRS treats the transaction as the investor undertaking a taxable exchange with the authorized participant (under Section 1001 of the code). The conversion is closed — and because this is a revenue ruling interpreting existing law, practitioners are being told to review past client conversions, a sign the position reaches backward into completed deals, not just future ones.

The notice also flags related strategies in the same family: so-called "box spread" ETFs that eliminate taxable income from options constructions through in-kind redemptions, straddle-based variations, record-date dividend strategies, and multi-position "tax-aware" fund strategies designed to manufacture capital gains paired with ordinary losses. The scope is deliberately broad.

4. Does this affect your spot crypto ETF?

Here is the honest answer: probably not directly — but don't ignore it.

What changed is aimed at fund structures and their sponsors, not at individual shareholders. Your personal tax rules for selling crypto — capital gains and losses on dispositions, reported on Form 8949 — are untouched by this notice. The notice names no specific funds.

There are, however, two things worth knowing. First, the IRS's language reaches digital assets held directly or through trusts, so the eventual guidance could be broad; the full exposure picture won't be clear until Treasury writes actual rules. Second, funds that are forced to restructure can pass costs through to shareholders in the form of higher fees or fund closures — which is why fund-level tax risk matters even to buy-and-hold investors.

The practical takeaway: if you hold crypto in an ETF, you don't need to sell because of this headline. You do want to keep an eye on communications from your fund sponsor about structural or fee changes in the months ahead.

5. What to watch next: comments, guidance, retroactivity

  • October 28, 2026: the comment deadline. Fund sponsors and their counsel will argue for narrower treatment before the IRS finalizes its position. Expect trade groups to push hard.
  • Possible guidance: the agencies may respond with new regulations, additional rulings, or designations of certain arrangements as "transactions of interest" or "listed transactions" — classifications that carry heightened reporting requirements.
  • Retroactivity: the notice explicitly warns that guidance could apply to transactions that already took place. That's the sentence that has fund lawyers' attention — and why Revenue Ruling 2026-20 (which interprets existing law) already has backward reach.
  • Examination risk: the IRS has said it may challenge these arrangements under existing law during examinations, without waiting for new rules.

6. Your action checklist

  1. Don't panic-sell your ETF on a tax headline. This is a fund-structuring dispute, not a change to your capital gains rules.
  2. Read your fund's prospectus updates. Watch for disclosures about tax risk, fee changes, or restructurings in the next few quarters.
  3. If you did a Section 351 conversion, talk to your advisor. Revenue Ruling 2026-20 has backward reach — past conversions may need review.
  4. Keep your own records clean. None of this changes your obligation to track your own trades and basis. If you sold crypto this year, reconcile your forms on Form 8949 and run an estimate with our free crypto tax calculator.
  5. Year-end is still the season for loss harvesting. With extension season over, October through December is when harvesting actually matters — see our tax-loss harvesting estimator.
Not tax advice. This guide is educational content only and does not constitute tax, legal, or financial advice. The IRS guidance described here is evolving — consult a qualified tax professional about your specific situation before making decisions based on this information.

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