"""

Which ETF transactions does the new guidance target?

ETF tax deferral strategies will be assessed under a narrower lens after the latest regulatory notices in the U.S. The U.S. Treasury Department and the Internal Revenue Service (IRS) are paying closer attention to structures designed to defer capital gains tax, especially when highly appreciated stocks are transferred through an intermediary into a new ETF and the portfolio is then quickly reshuffled.

At the center is Section 351 of the tax code. Under that rule, investors can in certain cases transfer assets to a company in exchange for shares without being treated as having realized a capital gain. But tax authorities stress that structures in which an ETF is used merely as a conduit for securities transfers, with tax avoidance as the end goal, are not protected under the current rules.

Treasury Secretary Scott Bessent said in a post this week that the move amounts to a serious tightening against transactions designed to exploit the tax code. An IRS revenue ruling also makes clear that some Section 351 ETF conversions intended to obscure capital gains are not valid under current law, according to tax authorities.

Which investors could be affected?

These structures are said to be used not by small investors, but mostly by high-income and high-net-worth individuals. One major reason is cost. Experts say creating a new ETF can cost roughly $200,000-$300,000.

  • Some market participants argue that at least $25 million in appreciated stock is needed for the transaction to make economic sense.
  • Some advisers go even further, saying the approach does not make sense for portfolios worth less than $100 million.
  • According to a Bloomberg analysis from July 2026, ETFs created for this purpose had reached a total size of $22 billion, while deferred capital gains tax had climbed to $6.5 billion.

Even so, regulators are not treating every Section 351 transaction as problematic. The guidance explicitly says that if a newly launched ETF is funded with assets that fit its investment thesis and those assets are intended to remain in the fund under ordinary conditions, the transaction will not automatically be viewed as suspicious.

Gray areas and next steps

One of the most notable issues in the new notice is timing. Tax authorities view transactions carried out shortly after appreciated securities are transferred into an ETF as suspicious, but what exactly qualifies as “shortly after” has not yet been defined. That uncertainty has led lawyers and tax advisers to expect more detailed guidance in the months ahead.

The IRS and Treasury plan to collect comments on the notice until October 28. Experts say the move is not aimed at the day-to-day operation of the very large ETF market, but could add further limits to models that try to generate tax advantages through rapid portfolio diversification in smaller-scale structures. The notice also says other tax deferral methods, including transfers to partnerships and option-based “box spread” strategies, are being examined more closely.

"""