IRS warns crypto ETFs over tax-avoidance structure, flags possible retroactive enforcement

The IRS warned that ETFs holding cryptocurrencies have used a transaction structure to avoid recognizing taxable gains and said the corrective measure could be applied retroactively to past trades. Under U.S. tax law, funds must earn more than 90% of their income from traditional assets such as stocks and bonds to maintain tax-exempt status. The IRS moved to block what it described as a loophole used by some conventional funds, which transferred crypto holdings in kind to Wall Street authorized participants, or APs, instead of recording trading gains on their books to avoid taxes. Bitcoin spot ETFs using a grantor trust structure, including BlackRock’s, as well as funds operating through offshore subsidiaries, are excluded from the enforcement action.