Wall Street is continuing to launch new box-spread exchange-traded funds (ETFs) and expand existing ones, despite recent warnings from the U.S. Treasury Department about these products being potentially abusive tax strategies. The total assets in these box ETFs have now approached $30 billion. These funds are designed to mimic the returns of Treasury bills but classify the profits as capital gains, which are taxed at a lower rate than ordinary interest income. This tax arbitrage makes them particularly attractive to wealthy investors.
Prominent examples include the Alpha Architect 1-3 Month Box ETF, which holds $13 billion in assets, and the AQR TA Delphi Plus Fund from AQR Capital Management, with $6.6 billion in assets as of June 30, 2026. Treasury officials have expressed concern that these strategies exploit disparities in tax treatment and undermine the intent of the tax code. Deputy Assistant Secretary for Tax Policy Kevin Salinger stated that the Treasury is not prepared to turn a blind eye to aggressive tax planning, even if these strategies are currently technically legal.
The Treasury Department is considering designating these strategies as "transactions of interest," which would require investors and promoters to report them to the IRS. Such a move could significantly curb their use. Officials have also noted a surge in the use of "heartbeats," or in-kind redemptions, by ETFs to defer or avoid capital gains tax, costing the government an estimated $48 billion annually. These artificial flows have grown faster than the broader ETF market, which has quintupled to almost $15 trillion in assets over the last decade.
The Treasury's scrutiny focuses on practices such as 351 conversions, box-spread ETFs, products generating ordinary income offsets, and funds sidestepping dividend income. Salinger highlighted pitch decks advertising substantial ordinary losses, such as a $300,000 ordinary loss on a $1 million investment, as examples of concerning marketing. Officials from the IRS and Treasury met with tax professionals to discuss these issues, emphasizing that while they are not challenging the general use of certain tax code sections by ETFs, they are concerned about applications that produce tax results that seem "too good to be true."
