A Bloomberg investigation published in June 2026 reveals how the exchange-traded fund industry exploits a tax provision to defer or permanently avoid capital gains taxes, costing the US Treasury an estimated $48 billion annually. The beneficiaries are overwhelmingly the wealthiest Americans.
How the magic trick works
When a mutual fund sells stocks at a profit, it must distribute 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-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 “heartbeat trades,” where authorized participants deposit cash into an ETF and quickly redeem shares in-kind, specifically to flush appreciated securities out of the fund. These are choreographed moves designed purely to eliminate tax liabilities.
The numbers have doubled since 2019
Bloomberg previously estimated in 2019 that about $23 billion in taxes were being deferred through these mechanisms. The current $48 billion figure represents more than a doubling in just seven years. In perspective, that’s roughly enough to fund the entire Department of Homeland Security budget.
Who benefits, and who pays
The top 1% of income earners capture the majority of the tax savings. Wealthier households hold more financial assets, including ETFs, and are 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, as spot Bitcoin and Ether ETFs haven’t yet accumulated the same magnitude of unrealized gains.