A Section 351 exchange under U.S. tax law lets you transfer assets like stocks to a corporation (e.g., a new Exchange-Traded Fund, or ETF) in return for shares, without triggering taxes on gains or losses—if you meet the rules.
How it Works with ETFs:
- You can use this strategy to “seed” a new ETF with a portfolio of appreciated investments, like stocks.
- Instead of paying taxes right away, you carry over your original cost basis and holding period to the ETF shares you receive. This defers taxes on the gains.
Key Rules to Know:
- Diversification: Your portfolio must be well-balanced—no single stock can be more than 25% of the total, and stocks making up over 5% cannot exceed 50% combined.
- Control: After the exchange, contributors must collectively hold at least 80% of the ETF’s control.
- Recordkeeping: It’s essential to track the cost basis and purchase date of your transferred stocks to apply the correct taxes later.
- Client Permission: Investors in managed accounts must approve the transfer.
- ETF Strategy Match: The assets you transfer should fit the ETF’s investment goals.
Why It Matters:
This approach can save you taxes while benefiting from the ETF structure, such as transparency and market flexibility. But it needs expert planning and legal guidance to execute correctly.
To simplify this process, investors can explore tools like 351conversion.com, which connects them with ETF issuers, ensuring a smooth and compliant transition of assets.