IRS Cracks Down on ETF Strategies Used by Wealthy Investors to Avoid Capital Gains Taxes

The IRS began scrutinizing certain exchange-traded fund strategies in October 2026 that wealthy investors have used to defer or avoid capital gains taxes. The agency flagged the approaches as potentially abusive, according to reporting from CNBC and Experian.

The strategies in question involve using ETFs in ways that allow investors to swap appreciated assets without triggering a taxable event. Some approaches exploit the in-kind creation and redemption mechanism that ETFs use to manage their portfolios. That mechanism, which is a standard feature of ETF structure, allows fund managers to exchange securities without generating capital gains inside the fund. Certain investors have used variations of this process to move appreciated assets out of taxable accounts.

The IRS said it is reviewing transactions going back several years and may assess penalties on investors who used the strategies. The agency did not name specific funds or investors in its initial announcement.

Tax attorneys said the crackdown signals that the IRS is paying closer attention to sophisticated tax planning strategies that have grown in popularity as ETFs have become the dominant investment vehicle for both retail and institutional investors.

ETFs now hold trillions of dollars in assets and have largely replaced mutual funds for many investors because of their lower costs and tax efficiency. The tax efficiency of ETFs is a legitimate feature of their structure, but the IRS is drawing a line between standard ETF investing and strategies it considers designed primarily to avoid taxes.

Investors who have used complex ETF-based tax strategies should consult a tax advisor to assess their exposure. The IRS said it will issue further guidance on which specific approaches it considers abusive.