Developments in Exchange-Traded Fund Taxation: Treasury Reviewing Tax Treatment of Certain ETF Transactions

Who may be interested : Registered Investment Companies; Directors of Registered Investment Companies; Investment Advisers; Private Funds

Quick Take : On July 21, 2026, the Wall Street Tax Association held a seminar at which Department of Treasury (Treasury) officials discussed a range of transactions that have attracted government attention because the resulting tax treatment may appear “too good to be true.” Among the topics discussed were several exchange-traded fund (ETF) transactions that rely on the nonrecognition treatment afforded by section 852(b)(6) of the Internal Revenue Code (IRC). Although the officials emphasized that they do not object to the routine use of section 852(b)(6) by ETFs, they indicated that Treasury is reviewing certain applications of the provision, including ETF seeding transactions using section 351 of the IRC, tiered ETF structures, cryptocurrency-related strategies, and options-based strategies. The officials solicited industry input as it evaluates whether further guidance or other action may be appropriate.

At the seminar, Kevin Salinger, Deputy Assistant Secretary for Tax Policy at Treasury, and Erika Nijenhuis, Senior Counsel at Treasury, confirmed that the government has taken an interest in ETF formation transactions under section 351 of the IRC of 1986 and the tax treatment of certain types of ETF strategies because the tax treatment of the transactions seems “too good to be true.”

While neither Salinger nor Nijenhuis definitively stated that any ETF transactions were being “blessed” or otherwise receiving improper tax treatment, Mr. Salinger said, “[w]e’re not here to be over-broad or disruptive, but we are also not prepared to turn the blind eye to aggressive planning,” according to Bloomberg coverage of the event.

ETFs use section 852(b)(6) of the IRC for tax efficient in-kind distributions of portfolio securities to avoid gain recognition. According to Salinger and Nijenhuis, Treasury does not have issues with the general use of section 852(b)(6) by ETFs, but its application in certain circumstances is being reviewed, such as:

• Section 351 in-kind contributions seeding new ETFs followed by the in-kind distribution of the contributed assets in a nontaxable ETF redemption under section 852(b)(6) where the contributed securities are not consistent with the ETF’s investment strategy.
• ETFs that trade in and out of non-dividend-paying ETFs for tax purposes where the ETF of ETFs used section 852(b)(6) to distribute the portfolio ETF shares in-kind to avoid receiving income and gain distributions from those ETFs.
• ETFs that use “box spread” strategies that distribute options in-kind under section 852(b)(6) to replicate Treasury bill returns taxed as capital gains rather than interest income.
• ETFs using section 852(b)(6) to distribute non-securities assets like cryptocurrencies to avoid recognition of non-qualifying income that might otherwise impair an ETF’s reliance on subchapter M of the IRC as a pass-through tax entity.
• ETFs structured to generate losses by using section 852(b)(6) to avoid gain recognition on in-kind distribution of portfolio securities with gains and loss recognition on cash sales of portfolio securities with losses.

“We do not want to act in a way that rewards taxpayers or promoters who have crossed lines that should not be crossed and disadvantages taxpayers who have stayed within the lines,” Salinger is also reported to have said. The Treasury officials solicited input from the investment management community on topics they discussed to inform them when they eventually act, whatever that may involve.

Generally, the Treasury speakers acknowledged the importance of section 852(b)6 to the ETF industry, the viability of section 351 exchanges where ETF dispositions of assets are made in the ordinary course, and the viability of many tax-planning strategies used by ETFs.