The U.S. Internal Revenue Service (IRS) has put a stop to the trading structures of certain exchange-traded funds (ETFs) that have been using virtual assets to reduce their taxable gains.
According to reports from various news outlets on Tuesday, the IRS cautioned against funds transferring profits from virtual asset trading to authorized participants (APs) in the form of physical assets to sidestep taxation.
Under U.S. tax law, general funds must derive over 90% of their income from qualified assets such as stocks and bonds to maintain their tax-exempt status as investment companies. Some funds have circumvented this requirement by distributing virtual asset trading profits to APs in physical form.
The IRS is scrutinizing the tax implications of such transactions and stated that this action could be applied retroactively to past trades.
However, products structured as trusts, like Bitcoin spot exchange traded funds (ETFs), and funds utilizing offshore subsidiaries are exempt from this direct measure. The IRS has also initiated a public consultation on the broader strategies of funds that have unusually leveraged ETF tax regulations.
