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.
