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US Treasury Eyes ETF Tax Strategy
28 Feb
Summary
- Treasury officials discussed increasing scrutiny of ETF tax strategies.
- A 'transaction of interest' designation may require more IRS disclosures.
- The tactic allows portfolio rebalancing without immediate capital gains tax.
The US Treasury Department is evaluating a popular tax strategy used within the $14 trillion ETF industry. In recent meetings with the Investment Company Institute and tax attorneys, officials discussed potential actions concerning "351 conversions." This method enables investors to adjust portfolios of appreciated assets without immediately incurring capital gains tax liabilities.
One proposed measure is designating these conversions as "transactions of interest." This classification, viewed as having tax-avoidance potential, would necessitate increased disclosure to the IRS. The Treasury is also considering other forms of expanded guidance to address the growing use of this strategy.
Such conversions allow for portfolio rebalancing, sometimes significantly altering holdings. For instance, an ETF might swap a substantial portion of its assets shortly after listing. This strategy provides a significant benefit by deferring taxable gains, allowing for longer investment periods or eventual cost basis resets.
