The 351 Exchange: What Investors Need to Know

The 351 exchange, however, allows investors to take low-cost basis investments and exchange them for—in this case, a newly formed ETF—without selling the investment, which would otherwise create a taxable event.

The basic idea is that an investor who has been in the market for a few years likely has some highly appreciated, low-cost basis positions that they’d love to diversify or hedge. But to do that, they’d have to sell and pay taxes. So instead, they do nothing and hold—even though it throws their portfolio balance out of whack.

With a 351 exchange, assuming one meets certain requirements, an investor can take a group of investments and exchange them for shares of a newly formed ETF, allowing them to diversify while deferring taxes.

We are going to start hearing a lot more about these as RIAs roll SMAs into ETFs and as others execute what are called syndicated 351s—where they raise money from scratch to help a wider group of investors diversify out of highly appreciated positions without having to pay Uncle Sam on the way into the new ETF.

Stay tuned for more on this subject. The ETF nerd community is going nuts over this, and it will start to trickle into the normie world soon.

It's important to remember that tax laws are complex, and it's always best to consult with a qualified financial advisor or tax professional before making any decisions.

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