Treasury, IRS Target ETF Tax Dodge for Wealthy — SkimNews
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- U.S. Treasury and IRS released joint guidance clarifying that Section 351 ETF transactions designed to avoid capital gains taxes are invalid under current law, emphasizing scrutiny of transfers where ETFs act as 'mere conduits' for tax avoidance.
- Scott Bessent stated in an X post that Treasury is serious about cracking down on abusive tax transactions, referencing the new guidance and repeating a July warning against 'Wall Street tax dodges' exploiting the federal code.
- IRS issued a revenue ruling showing concern over investors transferring highly appreciated securities into newly formed ETFs and quickly distributing them, resulting in portfolio diversification without recognizing built-in gains.
- Tax professionals note the guidance leaves gray areas, particularly around what constitutes 'shortly after' contribution for suspicious redemptions, expecting further clarification and 'facts and circumstances' analyses in future audits.
- Wealthy investors using Section 351 to seed ETFs with $25M–$100M+ in appreciated stock may face new restrictions, though legitimate uses—like gifting or long-term portfolio efficiency—are still permitted under the notice.
- Treasury and IRS are reviewing additional strategies, including partnership transfers linked to Section 351 and ETFs using box spreads to defer gains, with comments on the notice due by October 28.
- Jeffrey Colon, Brian Gray, and Joshua Norman confirm the focus is on abusive financial engineering, not standard ETF creation mechanics, which remain essential to the multi-trillion-dollar ETF industry.
Why it matters: High-net-worth individuals who used rapid-fire ETF conversions to dodge capital gains taxes now face audit risks and potential liabilities, while advisors must navigate unclear timelines like 'shortly after' contribution. The $6.5B in deferred gains identified by Bloomberg makes this crackdown materially consequential for wealth managers and tax planners.
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