Treasury, IRS Crack Down on Wealthy ETF Tax Dodge — SkimNews
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- Treasury Secretary Scott Bessent announced the crackdown on X this week, stating that "our message on these conversions is clear: they don't work under existing law" and that Treasury is "serious about cracking down on transactions designed to dodge taxes"
- The IRS revenue ruling targeted a specific pattern where appreciated securities are transferred to a newly formed ETF and then distributed "shortly after," leaving the investor with a "materially different" portfolio without recognizing built-in gains
- Section 351 exchanges are used almost entirely by the ultra-wealthy — creation costs run $200,000-$300,000, and experts say investors need at least $25 million in appreciated stocks to make it viable, with one advisor setting the bar at $100 million
- A Bloomberg analysis from July found $22 billion in ETFs had been created through this strategy, deferring up to $6.5 billion in capital gains, with activity accelerating significantly since 2024
- The notice leaves significant gray area — particularly what "shortly thereafter" means for post-seeding redemptions — and the IRS and Treasury are accepting public comments through October 28
- The crackdown additionally targets transfers to partnerships tied to Section 351 conversions and ETFs using "box spread" options strategies that allow investors to defer capital gains
- Cambria Funds founder Mel Faber offered a contrarian read, writing that "Regulators opened the door this week for well designed 351s to hit the mainstream" — a framing that the dominant 'crackdown' coverage overlooks
Why it matters: The crackdown puts high-net-worth investors and their advisors on notice that creating a short-lived ETF purely to swap appreciated stocks will be treated as tax avoidance, not legitimate planning. With $22 billion in such ETFs already created and up to $6.5 billion in deferred gains at stake, the notice's vague 'shortly thereafter' language leaves critical compliance questions unresolved until further guidance — with public comments due by October 28.
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