IRS Targets Tax-Avoidance Strategies in ETFs and Derivatives

The U.S. Department of the Treasury and the IRS issued Notice 2026-62, identifying several "Tax Alpha" strategies used by wealthy investors as potentially abusive. These include Section 351 conversions, Box Spread ETFs, and derivative-based tax-loss harvesting. A concurrent Revenue Ruling 2026-20 determined that specific Section 351 conversions are taxable exchanges. The IRS is seeking industry feedback by October 28, with potential for future guidance to be applied retroactively. Treasury Secretary Scott Bessent stated the move aims to curb transactions designed to circumvent federal tax laws.