U.S. Treasury Department warns of crackdown on abuse of ETFs to avoid taxable gains

The U.S. Treasury Department has warned that it will crack down on the abuse of ETFs to avoid taxable gains. (Bloomberg file photo)

[Financial Channel/Comprehensive Report] The U.S. Treasury Department warned on Monday (28th) that it may crack down on "potentially abusive" strategies and issued a ruling aimed at cracking down on the abuse of ETFs to avoid taxable gains. This is the first step taken by Washington to crack down on wealthy U.S. investors using a series of strategies to reduce taxes.

The Financial Times reported that the U.S. Treasury Department said in a notice that its team is investigating the use of strategies designed to produce tax results that may be inconsistent with the purpose and proper application of relevant federal tax rules. In a companion ruling, the IRS targeted a strategy called a "351 conversion," which allows investors whose assets have appreciated to rebalance their portfolios without incurring taxable gains.

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In recent years, strategies to help wealthy Americans minimize their tax burden have become increasingly popular. Thanks to the boom in the U.S. stock market, some investors have shifted their focus to "tax alpha," which is the income gained by reducing their tax burden.

According to calculations by the Financial Times, from the beginning of 2025 to April this year, hedge funds providing this strategy accumulated more than US$90 billion (approximately NT$2.86 trillion). Since 2021, ETFs established using 351 conversions have raised a cumulative total of at least US$21 billion (approximately NT$668.85 billion).

This is one of several strategies to take advantage of the favorable tax treatment of ETFs. U.S. investors can often avoid paying capital gains taxes by conducting "physical" transactions with market makers, so that no cash transactions occur. But the Internal Revenue Service ruled Monday that some of those transactions would be considered taxable.

U.S. Treasury Secretary Bessent said on the social platform Bessant added that the Treasury Department attaches great importance to cracking down on transactions designed to evade taxes or exploit loopholes in federal tax laws.

The notice from the Treasury Department stated that they are seeking more information on a series of "tax avoidance fund use strategies" and a list of ETF operations including 351 conversions. The written notice represents the first escalating action by the Treasury since it expressed interest in investigating tax strategies during an industrial action in July, when Treasury officials warned they would not "turn a blind eye" to aggressive tax planning.

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