The IRS just closed an ETF tax move. It is not the one you own.

What the IRS issued

On September 28, 2026 the Treasury Department and the IRS released Revenue Ruling 2026-20 and Notice 2026-62, issued concurrently and scheduled for the same Internal Revenue Bulletin. The ruling addresses what the IRS calls a “section 351 conversion transaction.”

The arrangement it targets

Suppose you hold a single stock worth far more than you paid for it. Selling to diversify means a capital gains bill. The arrangement in the ruling works around that: you contribute the securities to a newly formed exchange traded fund in a transfer meant to qualify as a tax-free exchange under section 351. As part of the same plan, the ETF then hands some or all of those same securities to an “authorized participant” to redeem its shares under section 852(b)(6). You walk away holding ETF shares. Your concentrated position is gone, and so, in theory, is the tax.

What the IRS held

The ruling looks at the substance rather than the steps. In its words, the transfer “is recharacterized to reflect the substance of the transactions carried out pursuant to the plan,” and the investor “is treated as undertaking a taxable exchange under § 1001” with the authorized participant. The ruling adds that the result is the same when several investors do this together.

Revenue Ruling 2026-20 also amplifies Rev. Rul. 71-336 and distinguishes Rev. Rul. 75-447 and Rev. Rul. 88-32. It contains no transition rule and no effective-date provision.

Why this almost certainly does not affect you

Ordinary ETF investing is untouched. Buying an ETF, holding it, selling it, holding it inside an IRA or 401(k) — none of that is what the ruling addresses. The headline phrase “ETF security transfers” describes a transaction between an investor, a brand-new fund and an authorized participant, not anything that happens in a normal brokerage account.

This matters to a narrow group: people wealthy enough to hold a large concentrated position, who were sold a structure to diversify out of it without a tax bill.

What Notice 2026-62 signals

The notice is the broader warning. It names several other strategies the IRS is examining, including partnership exchange funds under section 721, box spread option positions in ETFs, arrangements to eliminate record-date dividends, techniques to sidestep the section 851(b)(2) gross income test, and derivative straddle positions.

Treasury and the IRS say they are considering further guidance, which “may include regulations, notices, revenue rulings” and the potential identification of a transaction as a transaction of interest or a listed transaction. That last phrase carries disclosure obligations and penalties, which is why advisors are paying attention. Written comments were requested by October 28, 2026.