Gemara

93b (Mishnah #1): If one stole wool and he made garments, he pays the value at the time he stole it.

Inference: He pays the value at the time he stole it because he made Kelim. Had he only been Melaben (bleached) the wool, he would not!

Contradiction (Beraisa): If one stole wool and he was Melaben it, or flax and he cleaned it, he pays the value at the time he stole it.

Answer #1 (Abaye): The Tana of our Mishnah teaches about a reversible change, which acquires mid'Rabanan (one may not infer that Libun alone does not acquire). All the more so, an irreversible Shinuy acquires mid'Oraisa. The case is, he stole spun wool. The garments can be unraveled to wool again. The Beraisa teaches only about irreversible changes, which acquire mid'Oraisa.

Answer #2 (Rav Ashi): Also the Tana of our Mishnah teaches only irreversible changes, which acquire mid'Oraisa (one may not infer that Libun of wool does not acquire). He discusses felt garments (Libun is not done to the wool).

Contradiction (Mishnah #2): If a Yisrael did not give the first shearings to a Kohen until he dyed them, he is exempt from giving them. If he did only Libun, he must give it. (This shows that Libun does not acquire!)

Answer #1 (Abaye): Mishnah #1 is like R. Shimon, who says that Libun is considered a Shinuy. Mishnah #2 is like Chachamim, who say that it is not.

Answer #2 (Rava): Both Mishnayos are like R. Shimon. If he unravels the wool, he does not acquire. If he combs it, he acquires.

Answer #3 (R. Chiya bar Aba): (According to all Tana'im,) if he washes (in water alone), he does not acquire. If bleaches it with sulfur, he acquires.

(Rava): R. Shimon holds that Libun acquires, but dying does not, for dye can be removed through soap.

Sukah 9a: Beis Hillel expound "Chag ha'Sukos Ta'aseh Lecha" to disqualify a stolen Sukah.

We disqualify stolen Tzitzis from "they will make for themselves" - from theirs.

Rishonim

Rambam (Hilchos Geneivah 1:13): If one stole a lamb or calf, and it grew up and became a ram or ox, he pays Kefel like at the time of the theft. If he slaughtered or sold it after it grew up, he acquired it through the Shinuy. He does not pay four or five, for he slaughtered or sold his own animal.

Rambam (Hilchos Tzitzis 1:11): One may not make Tzitzis from stolen wool.

Nimukei Yosef (Hilchos Tzitzis (after Menachos) 12b DH Kesherah): Stolen threads are Pasul; they must be "yours". If one stole wool and made strings, they are Kosher, for he acquired through despair and Shinuy ha'Guf. L'Chatchilah it is forbidden, due to "Sonei Gezel b'Olah."

Poskim

Shulchan Aruch (OC 11:6): If one made Tzitzis from stolen wool, they are Pasul, for it says "they will make for themselves" - from theirs.

Mishnah Berurah (27 and Bi'ur Halachah DH Im): If one bought strings or the garment on credit and the seller is anxious for the money, and the buyer does not want to pay, letter of the law they are not his, so he was not Yotzei.

Bi'ur Halachah (DH mi'Tzemer): If one attached stolen strings and later bought them, perhaps he must untie them and attach them again. Meticulous people pay for the strings before attaching them, to acquire them mid'Oraisa.

Rema: This is only if he stole strings. If he stole wool and made strings, they are Kosher. However, l'Chatchilah one may not make them.

Beis Yosef (DH Oso'ah): The Rambam disqualifies Tzitzis from stolen wool. Perhaps he discusses before despair. Alternatively, he discusses even after despair. He does not acquire through Shinuy, for it is reversible.

Rebuttal (Drishah 2): The Tur (CM 361) says that Shinuy ha'Shem acquires with despair, even if it is reversible! He does not say that the Rambam disagrees! Rather, the Rambam and Tur discuss before despair.

Question (Taz 5): Both of the Beis Yosef's answers are difficult. We would not need a verse to teach about before despair. This is obvious, just like we say that no verse is needed to disqualify a stolen Korban before despair (67a)!

Answer (R. Akiva Eiger): There no verse is needed, for the thief cannot be Makdish it before despair. Here a verse must teach about before despair.

Taz (5): To explain why a thief who made garments did not acquire, Abaye (93b) needed to say that he stole spun wool. Had he stolen wool, he would acquire through Libun. One cannot make strings without Libun; it is an irreversible change. The Rambam must hold like R. Tam, who says that Ula holds that despair always acquires, except for Korban. Tosfos (Sukah 30a DH Ha) equates all Mitzvos mid'Oraisa to Korbanos. Therefore, despair and Shinuy ha'Shem do not help. In any case, it is despised due to Mitzvah ha'Ba'ah b'Aveirah. This disqualifies even b'Di'eved. Therefore, one may not rely on the Nimukei Yosef. Stolen strings are Pasul in every case, like the Rambam connotes. Why did the Rema rely on the Nimukei Yosef against the Rambam, especially since the Nimukei Yosef did not mention the Rambam?!

Magen Avraham (10): The Rema connotes that he acquired through Shinuy Ma'aseh. However, the Nimukei Yosef says that he acquired through despair and Shinuy ha'Guf. Perhaps he holds that since it is reversible, he acquires only along with despair. CM 360:6 says that it is a proper Shinuy.

Rebuttal (Bi'ur Halachah DH Aval): The Magen Avraham means that Libun acquires. The Shach and Acharonim refuted this. The Nimukei Yosef and Beis Yosef should say that spinning acquires. Bava Kama 93b proves this!

Magen Avraham (10): If the thief sold the Tzitzis, see Siman 649:1 (it is not Mitzvah ha'Ba'ah b'Aveirah for the buyer).

Question (R. Akiva Eiger 9): There we discuss being Yotzei on Yom Tov Sheni! The only concern is Mitzvah ha'Ba'ah b'Aveirah, but you need not own it! If one bought after despair, he acquired before the Mitzvah, so it is not Mitzvah ha'Ba'ah b'Aveirah! It is Kosher, like Shinuy Ma'aseh here! Perhaps the Magen Avraham means that those who allow blessing there would allow blessing here.

Bi'ur Halachah (DH La'asosan): He acquires through despair and Shinuy, and the Aveirah is not from the Mitzvah itself. However, since he acquires through spinning, and this is part of the Mitzvah, for they must be spun Lishmah, it is Mitzvah ha'Ba'ah b'Aveirah. It seems that the Gra disagrees, and forbids only due to the Berachah.