The IRS and Treasury recently issued Revenue Ruling 2026-20 and Notice 2026-62, signaling increased scrutiny of certain investment strategies that seek to generate tax-efficient results. The guidance focuses on certain ETF transactions as well as trading strategies used by some tax-aware investment funds and separately managed accounts.

Revenue Ruling 2026-20

Revenue Ruling 2026-20 addresses a transaction in which an investor contributes appreciated securities to a newly formed ETF (exchange-traded fund) in an exchange intended to qualify for tax-free treatment under Section 351. Shortly thereafter, as part of the same plan, the ETF uses securities contributed by the investor to redeem shares held by an authorized participant.

The IRS concludes that the transactions should be viewed together. Applying substance-over-form and step-transaction principles, the IRS treats the investor as having engaged in a taxable exchange under Section 1001 with the authorized participant.

Importantly, the guidance does not take issue with ETF-seeding transactions generally. Notice 2026-62 distinguishes situations where an ETF is seeded with assets consistent with its investment strategy that are expected to remain in the ETF, absent a substantial change in circumstances.

Notice 2026-62 and tax-aware strategies

Notice 2026-62 takes a broader look at investment strategies that seek to produce favorable differences in the character of gains and losses. The Notice highlights four strategies used by certain tax-aware funds and separately managed accounts:

• • Mixed-character currency straddles, including strategies involving foreign currency forwards and offsetting regulated futures currency contracts that receive different tax treatment
  • Mixed-character identified straddles: Identified straddles under Section 1092(a)(2) involving offsetting positions with different tax character, where the basis-adjustment rules may be used to produce capital gain and ordinary loss while avoiding the corresponding unfavorable character result when the result is capital loss and ordinary gain
  • Same-day foreign currency forward transactions, where certain tax elections are made selectively based on whether a position generates a gain
  • Selective terminations of notional principal contracts, where the manner in which a position is closed may result in different tax treatment depending on whether the position has a gain or loss

The common theme is the IRS's concern with strategies that use differences in tax character, timing, elections, or identification rules to generate capital gains and ordinary losses from economically similar or offsetting positions. The concern may be heightened where the strategy permits tax-sensitive decisions to be made with the benefit of hindsight, but the guidance also identifies strategies that may raise concerns even where no such hindsight is available.

What this means for investment managers

Notice 2026-62 does not change existing law or currently designate these strategies as listed transactions or transactions of interest. However, the Notice does state that Treasury and the IRS are considering this designation for certain strategies, among other potential additional guidance.

Of particular importance, the Notice states that future guidance could apply prospectively or retroactively to transactions that have already occurred. The IRS also makes clear that it may challenge “an abusive investment fund strategy” on examination under existing law, including applicable judicial doctrines.

Managers using strategies involving Sections 988, 1092 or 1256; notional principal contracts; or Section 852(b)(6) should consider reviewing both current and prior transactions, particularly where economically offsetting positions consistently produce capital gains and ordinary losses.

What does CohnReznick think?

Revenue Ruling 2026-20 and Notice 2026-62 signal increased IRS attention on tax-aware investment strategies, but they do not suggest that tax-aware investing itself is improper. In fact, the Notice distinguishes the strategies under review from “conventional, long-established tax planning that is consistent with the intent of Congress.”

The key takeaway for investment managers is that the IRS appears focused on how a strategy operates as a whole, particularly where related positions, elections, or transaction steps produce significantly different tax results despite offsetting economics.

Given the possibility of retroactive guidance and the IRS's ability to challenge transactions under existing law, managers using strategies similar to those described in the Notice should consider reviewing their existing positions and procedures.