IRS Latest Shot Across the Bow at Sophisticated Investment Fund and Tax-Planning Strategies
The IRS and Treasury recently issued Notice 2026-62, announcing increased scrutiny of certain sophisticated investment fund and tax-planning strategies.
The notice focuses on transactions involving exchange-traded funds (ETFs), regulated investment companies (RICs), partnerships, derivatives, and “tax-aware” investment strategies. The IRS is concerned that certain transactions may use technical provisions of the tax code to produce tax benefits that go beyond what Congress intended.
What transactions are being examined?
The notice identifies several areas of concern, including:
- Certain contributions of appreciated securities to ETFs under Section 351
- Certain partnership structures designed to achieve similar tax results
- Box spread and other derivative strategies
- Transactions involving ETFs around dividend record dates
- Strategies involving commodities and digital assets
- Certain straddle and foreign-currency transactions
- Strategies designed to generate ordinary losses while producing capital gains
- Certain selective termination of swap contracts
The IRS emphasizes that ordinary ETF investing and legitimate tax planning are not automatically affected. The concern is primarily with carefully structured transactions designed to obtain particular tax results while making little or no corresponding change to the investor’s economic position.
Revenue Ruling 2026-20
At the same time it issued Notice 2026-62, the IRS released Revenue Ruling 2026-20, addressing certain transactions in which appreciated securities are contributed to an ETF and then distributed shortly afterward.
For the transactions described in the ruling, the IRS concludes that the arrangement can be treated as a taxable exchange rather than a tax-deferred Section 351 contribution.
This ruling is particularly important for taxpayers and advisors involved in sophisticated ETF transactions.
What should investors and advisors do?
If you have participated in a sophisticated investment strategy involving ETFs, partnerships, derivatives, or other transactions described in the notice, it may be appropriate to:
- Review the transaction with your tax advisor.
- Determine whether the transaction falls within one of the strategies identified by the IRS.
- Review the tax opinion or analysis supporting the transaction.
- Consider whether additional documentation or a change in reporting position is appropriate.
For most investors who simply buy and sell publicly traded ETFs as part of a conventional investment portfolio, Notice 2026-62 does not change the basic tax treatment of those investments.
Why this matters
Notice 2026-62 is an important reminder that the IRS may look at the overall substance and purpose of a series of transactions, rather than evaluating each individual step in isolation.
Treasury and the IRS have requested comments on the transactions described in the notice. Comments are currently due October 28, 2026.
If you or your clients have used an investment strategy that may fall within the scope of Notice 2026-62, now is a good time to review the structure and its tax treatment with a qualified tax professional.
If you have questions or comments about this article, please do not hesitate to contact me at jcrouch@meadowscollier.com. You can also learn more about the author here .