The U.S. Treasury Department and the Internal Revenue Service (IRS) have initiated a significant crackdown on various tax-avoidance strategies predominantly used by wealthy investors and financial firms on Wall Street. This move includes a specific ruling against certain "351 conversion transactions" related to Exchange Traded Funds (ETFs) and a broader warning about other potentially abusive tactics. These actions aim to curb what officials consider aggressive tax planning that exploits federal tax rules.
The new measures, announced on September 28, 2026, by the Treasury and IRS, target strategies designed to circumvent taxable gains, with a particular focus on ETFs. The IRS has issued Notice 2026-62, identifying investment fund strategies that yield tax benefits inconsistent with federal tax rules. Furthermore, a related revenue ruling will treat some transactions tied to the 351 conversion as taxable exchanges, effectively limiting a structure that previously allowed investors to rebalance portfolios with appreciated assets without immediately triggering capital gains. The Treasury Secretary, Scott Bessent, stated via X that such conversions are not permissible under existing law and that the department is committed to targeting transactions designed to dodge taxes.
This regulatory tightening comes amidst a surge in demand for tax-minimizing strategies, driven by a booming U.S. stock market. Financial products leveraging "tax alpha," or gains derived from reducing tax liabilities, have seen substantial inflows. According to reports, hedge funds offering tax alpha strategies attracted over $90 billion between 2025 and April of this year, while ETFs created using 351 conversions raised at least $21 billion since 2021. The announcement has already had an impact, with shares of Affiliated Managers Group, which holds stakes in tax-aware investment platforms like AQR, experiencing a drop of up to 2%. Independent tax analyst Brent Sullivan described the move as a "seismic moment" in the ETF market, though he noted that routine tax planning involving 351 conversions may not be entirely eliminated and outcomes will depend on specific facts and circumstances.
The Treasury and IRS are also seeking more information on strategies employed by tax-aware funds and are considering further guidance or actions, which could be applied retroactively. This signals an ongoing effort to combat what they deem as "potentially abusive" and "too good to be true" tax trades, including certain hedge fund tactics involving swaps and currency derivatives used to generate ordinary losses to offset income tax.
