On September 28, 2026, the Treasury Department and the IRS issued Revenue Ruling 2026-20 and Notice 2026-62. Together, the guidance targets selected exchange-traded fund (ETF) redemption structures and tax-aware investment strategies that the government believes use nonrecognition, timing or character rules to obtain tax results consistent with the purpose and proper application of those rules.
The guidance does not challenge ordinary ETF operations or tax-aware investing generally. Its focus is on transactions that rely on the technical form of separate steps, instruments or elections to produce a result that Treasury and the IRS view as inconsistent with the purpose of the applicable rules.
The revenue ruling addresses a prearranged transaction in which an investor contributes a diversified portfolio of appreciated securities to a newly formed ETF under Section 351. Under the same plan, an authorized participant contributes securities consistent with the ETF’s investment thesis, or cash the ETF intends to use to acquire such securities. Shortly thereafter, the ETF uses securities contributed by the investor to redeem shares held by the authorized participant. After the steps are completed, the ETF holds a portfolio consistent with its investment thesis and materially different from the portfolio contributed by the investor.
Applying substance-over-form and step-transaction principles, the IRS treats the investor as engaging in a taxable exchange under Section 1001 with the authorized participant for the contributed securities used in the redemption. The holding is limited to the stated facts. Notice 2026-62 separately states that it does not address, and expresses no view regarding, a Section 351 transaction used to seed a newly established ETF with assets that are consistent with the ETF’s investment thesis and are intended and expected to be retained absent a substantial change in circumstances.
Notice 2026-62 gives comparable attention to strategies used by investment partnerships and separately managed accounts. These strategies generally rely on differences in the timing or character rules for offsetting or economically similar financial instruments. The intended result is often capital gain paired with ordinary loss.
The notice does not suggest that every tax-managed strategy is problematic. It expressly recognizes that long-standing techniques, including conventional tax-loss harvesting, may reduce federal income tax in a manner consistent with congressional intent. Its concern is directed to the specific strategies described and similar transactions that may produce unintended results.
The notice also identifies a partnership variation connected to a Section 351 conversion transaction, box-spread fund strategies, record-date strategies and redemptions intended to prevent gains from nonqualifying assets from entering the regulated investment company income test. Treasury and the IRS requested comments and indicated that additional regulations, notices, revenue rulings, reportable-transaction designations or other actions may follow.
The notice leaves open the possibility of future regulations, revenue rulings, notices or the designation of particular arrangements as transactions of interest or listed transactions. It also states that the IRS may challenge what it considers abusive investment fund strategies under existing law. Future guidance could apply prospectively or retroactively, depending on the applicable authority. Written comments on Notice 2026-62 are requested by October 28, 2026; later comments may be considered, subject to the timing of forthcoming guidance.
Treasury and the IRS state that future action is intended to target specific transactions they view as abusive, minimize compliance burdens and respect market expectations for conventional, long-established tax planning that is consistent with the intent of Congress. Taxpayers should therefore focus on whether their arrangements share the features identified in the notice rather than assume the guidance applies to every ETF conversion or tax-managed strategy.
Revenue Ruling 2026-20 resolves one specific ETF conversion fact pattern, but Notice 2026-62 is broader. It signals close scrutiny of both ETF-based structures and tax-aware strategies that use offsetting instruments, selective elections or payment classifications to separate capital gains from ordinary losses. The practical question is whether the transaction’s tax form and economic substance tell the same story.
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