Elm Wealth – Blog

Demystifying 351 ETF Exchanges

Section 351 of the U.S. tax code permits investors to contribute appreciated stocks, bonds or ETFs into a newly created ETF without triggering immediate capital‑gains tax, effectively seeding the fund at original cost basis. To qualify, no single security may exceed 25% of the contribution, the top five holdings must stay under 50%, and the contributors must own at least 80% of the new ETF after the exchange. The strategy offers tax deferral, liquidity and potential cost savings, but it is complex, subject to strict IRS tests and recent Treasury scrutiny. Elm Wealth views the approach as potentially valuable yet remains cautious about pursuing it themselves.