A Bloomberg investigation published in June 2026 details how the exchange-traded fund industry leverages a provision buried in the Internal Revenue Code, specifically Section 852(b)(6), to defer or permanently avoid capital gains taxes through a mechanism called in-kind redemptions. The beneficiaries are overwhelmingly the wealthiest Americans, with the top 1% of income earners capturing the largest share of tax savings.

How the magic trick works

When a mutual fund sells stocks at a profit, it has to distribute those capital gains to shareholders, who then owe taxes. Instead of selling appreciated stocks on the open market, ETFs hand those stocks directly to large institutional players known as authorized participants, typically major investment banks. This is the “in-kind redemption.” Because the ETF technically never sold the stock for cash, no taxable event is triggered.

Bloomberg’s reporting highlights a technique known as “heartbeat trades,” where authorized participants deposit cash into an ETF and then quickly redeem shares in-kind, specifically to flush appreciated securities out of the fund. These aren’t organic market transactions. They’re choreographed moves designed purely to eliminate tax liabilities.

The numbers have doubled since 2019

Bloomberg previously estimated in 2019 that around $23 billion in taxes were being deferred through these same mechanisms. The current figure of $48 billion represents more than a doubling in just seven years.

Since 2019, approximately $211 billion in capital gains have been avoided across major equity ETFs, according to prior Bloomberg reporting. To put $48 billion in annual lost revenue in perspective, that’s roughly enough to fund the entire budget of the Department of Homeland Security.

Who benefits, and who pays

The top 1% of income earners capture the majority of tax savings generated by ETF structures, per Bloomberg’s analysis. That makes sense: wealthier households hold disproportionately more financial assets, including ETFs, and they’re in higher tax brackets where capital gains deferral is most valuable.

Bloomberg’s investigation did not include cryptocurrency or digital asset ETFs in its scope. The relatively recent arrival of spot Bitcoin and Ether ETFs means those products haven’t yet accumulated the same magnitude of unrealized gains.