By Craig S. Cody, CPA, Certified Tax Coach | Craig Cody and Company | Published July 2026

You have one position that got huge. You can't sell it without writing a check that makes you sick.

There's a legitimate strategy for that, and it's getting a lot of attention right now. It's called a 351 exchange. You contribute your appreciated shares into a brand-new ETF while it's launching, you get ETF shares back worth the same amount, and you don't recognize a dollar of capital gain on the way in. Your basis and holding period carry over. You're diversified, and the tax bill waits.

Here's the catch, and it's the whole ballgame: the more concentrated you are, the less likely you are to qualify. The rule requires the portfolio you hand over to be diversified already. So the person with 80% of their net worth in one stock, the exact human this sounds built for, is usually the one who can't use it.

I'm writing this because Jason Zweig covered 351 exchanges in The Wall Street Journal ("The tax strategy for people suffering from stock-market success," The Intelligent Investor), and I've had three separate conversations about it since. In 23 years of doing this, I've watched a lot of good strategies get applied to the wrong person because the headline was better than the fine print. Let's go through what's actually true, what it costs, and what to do instead when it doesn't fit you.

What a 351 Exchange Actually Does

The mechanics are simpler than the name suggests.

Section 351 of the tax code says you don't recognize gain when you transfer property to a corporation in exchange for its stock, as long as the people transferring control the company right after. An ETF is a corporation for tax purposes. So a group of investors can seed a new fund with securities instead of cash, and take fund shares back.

You no longer own your old position directly. It's now part of the fund's diversified basket. Your original cost basis and holding period follow you into the ETF shares, so when you eventually sell, you'll owe tax measured from what you originally paid.

One timing rule matters a lot: you can only do this at a fund's inception. Not next month, not after it launches. If you miss the window, you wait for the next launch.

Deferral Is Not Forgiveness (Except in One Case)

Let's be precise, because this gets oversold.

A 351 exchange does not erase your capital gain. It moves it. The embedded gain rides into your ETF shares and comes due whenever you sell them. If you sell in three years, you pay then, measured from your original basis.

There's one exception, and it's the reason a lot of these deals happen. If you hold the ETF shares until you die, your heirs inherit them with a basis stepped up to the value on your date of death under Section 1014. The deferred gain effectively disappears.

That's a real outcome. It's also an estate plan, not an investment plan. If you're going to need this money at 68, "hold until death" isn't your strategy, and you should price the eventual tax into the decision instead of pretending it went away.

The 25/50 Test: Where Most People Get Disqualified

This is the part to read twice.

Section 351 has an off switch. Under IRC §351(e), the whole nonrecognition rule shuts down for transfers to an "investment company," which an ETF plainly is. The regulations give you the way through: you're fine if the portfolio you contribute is already diversified.

Diversified has a specific definition, borrowed from IRC §368(a)(2)(F):

• No more than 25% of the value of what you contribute can sit in the stock and securities of any one issuer.
• No more than 50% can sit in any five or fewer issuers.
• Cash doesn't count in the calculation, so you can't pad the denominator with it.

And no, you can't game your way in. The statute also excludes assets you acquired for the purpose of passing the test. Borrowing money to buy bonds so your Apple slice drops under 25% doesn't work; the code contemplated that move and wrote it out.

Now here's the piece that catches even careful humans. Say Apple is 20% of your invested assets, comfortably under the ceiling. You also own an S&P 500 index fund, which itself holds roughly 7% Apple. In practice those get combined, and your true single-issuer exposure sails past 25%.

I'll be straight with you about the state of the law here, because you deserve the honest version. The statute says fund shares count as "securities," which read literally would treat your index fund as one issuer. Market practice instead looks through the fund to its underlying holdings, which is what produces the Apple result above. That look-through isn't spelled out in the regulation, and clarifying it is one of the open questions the fund industry has asked Treasury to answer. Anyone who tells you this corner is settled is telling you what they wish were true.

The upshot is blunt, and Dimensional's co-chief investment officer Savina Rizova said it about as plainly as it can be said in Zweig's piece: if most of your wealth is concentrated in a single stock or two, this is not a tool for you.

Who It Actually Fits

So who's left? A specific and real group.

It fits the person who's moderately lopsided. Two or three outsized winners inside a broader portfolio, no single name over 25%, top five under half. It fits the human sitting on a legacy mutual fund or index position with an enormous embedded gain who wants a different, cheaper, more tax-efficient wrapper without triggering the gain to get there. It fits an inherited portfolio that's diversified on paper but built wrong for the person who now owns it.

That's not nobody. That's a lot of successful people. It's just not the founder holding one block of stock.

What It Costs and What It Takes

Practical friction, so you can decide if it's worth your Saturday.

Most sponsors want contributions of at least $1 million, though some accept less. You generally have to do some legwork yourself unless your advisor works at a firm that already runs these; Practus partner Robert Elwood, whose firm has advised on dozens of them, compared the search to "dating back in the days before Match.com." Sponsors are more approachable than people expect, and many will answer an email about an upcoming launch.

Fees are modest relative to the tax at stake. Tax analyst Brent Sullivan reported paying a one-time 0.05% on the assets he contributed to arrange his own exchange.

And the traffic is real. Since 2021, at least 80 funds have launched this way and pulled in $18 billion or more, according to Sullivan's tracking, with a couple dozen more in the pipeline. One firm, Plancorp, put more than 130 clients and $361 million into a single Dimensional fund launch.

Treasury Is Watching, and Nothing Is Settled

Zweig noted that Treasury had taken an interest. That story has moved since, and you should know where it stands today.

At a Wall Street Tax Association meeting on July 21, 2026, IRS and Treasury officials discussed these transactions directly. They declined to bless any specific deal. They acknowledged that 351 contributions still matter when the contributed assets fit the fund's investment profile and sales happen in the ordinary course of business. They raised a specific concern about pairing a tax-free 351 contribution with in-kind redemption distributions of those same securities back out of the fund. And they said they're considering the full range of regulatory tools while asking the industry to help draw the lines.

No guidance has been issued. The fund industry has formally asked for it.

What that means for you: the core technique is not a fringe position, but the edges are genuinely unsettled. Do a clean, plain-vanilla exchange into a broad fund you'd want to own anyway, and you're on defensible ground. Do something clever at the margins and you're volunteering to be the test case. I don't put clients in that seat.

If You Sold Your Agency for Buyer Stock, Read This Part

Here's where this hits home for the agency owners I work with.

You spent 20 years with essentially all of your net worth in one asset: your agency. Then you sold, and a chunk of the price came in acquirer stock. Congratulations, you're concentrated again. Same risk, different logo, and now there's a lock-up and an embedded gain on top.

A 351 exchange will almost certainly not solve that. One block of buyer stock is 100% of one issuer, and it fails the 25% test before you finish the sentence.

That doesn't mean you're stuck. It means you're in a different aisle of the store, and you should have been shopping there before you signed the deal. If an exit is anywhere on your horizon, the tax structure of the sale itself is where the real money is, and I've written about one of the biggest levers in Section 1202 and selling your agency tax-free.

When a 351 Doesn't Fit, You Still Have Moves

Being disqualified from one strategy is not the same as having no options. Depending on the size of the position and what you want the money to do:

• Sell in slices across tax years to keep gains out of your worst brackets and away from the thresholds that quietly raise your real rate.
• Give appreciated shares instead of cash to charity or a donor-advised fund, which sheds the gain and gets you a deduction at fair market value.
• Use a charitable remainder trust to sell the position tax-free inside the trust, take an up-front deduction, and draw income for life or a term of years.
• Hedge with a collar or a variable prepaid forward to cut downside risk and raise cash without a sale, watching the constructive-sale rules under §1259 that can treat too tight a hedge as a sale.
• Look at an exchange fund (a swap fund), the older cousin of this idea, if the fund's holdings genuinely diversify you.
• Or hold and plan the estate, which is a legitimate answer when the position is sound and the step-up is the point.

Every one of these has a downside I'd walk you through before recommending it. None of them is free. The right one depends on your basis, your bracket, your state, your age, your charitable intent, and how much of your comfort at night is riding on one ticker.

Who This Isn't For

Straight talk, because you've earned it.

A 351 exchange isn't for you if one or two names dominate your portfolio. It isn't for you if the contribution would be well under a million dollars, since most sponsors won't take it. It isn't for you if you'll need to sell those shares within a few years, because you'd just be relocating the tax bill and paying fees for the trip. And it isn't for you if the only fund launching on your timeline is one you wouldn't buy with cash.

That last one is the trap I worry about most. Deferring tax into a mediocre fund with high fees is a bad trade dressed up as a smart one. Zweig's closing advice is the right instinct: pick a broad, index-tracking fund from a manager with staying power, keep annual fees low (0.25% or less is a reasonable ceiling), and only do it if you'd want to own the thing anyway.

Never let the tax tail wag the investment dog. I've seen humans save 20% on tax and lose 40% on a bad fund. That math doesn't work.

What to Do Now

Start with three numbers, not a phone call to a fund sponsor.

First, your actual single-issuer concentration, counting what's inside your index funds, not just what's in your brokerage account by name. Second, your real cost basis on each lot, because the answer often differs by lot. Third, what a sale would actually cost you, federal plus state plus the phase-outs that come along for the ride. The headline rate is almost never the real rate.

Once you know those three, the strategy picks itself. Usually it isn't the one from the article you read.

This is the difference between a tax preparer conversation and a tax advisor conversation. One records what already happened. The other decides what happens next, and with a concentrated position the decision is worth real money either way. That's an argument I've made before in why filing a return isn't a tax strategy.

We don't manage investments, and we're not going to sell you a fund. What we do is make sure the tax side of the decision is right before you make it, and tell you plainly when a strategy isn't yours. If you're sitting on a position you can't comfortably sell, let's talk.

Craig S. Cody, CPA | Agency CPA | craigcodyandcompany.com

Source acknowledgment: This article was prompted by and draws on Jason Zweig's column "The tax strategy for people suffering from stock-market success," published in The Wall Street Journal (The Intelligent Investor). The market-size figures, minimums, fee data point, and the quotes from Savina Rizova, Robert Elwood, and Brent Sullivan are reported in that piece and are credited to it. The legal analysis, the caveats, and the alternatives are ours, and where our reading of the statute differs from the article's summary, we've said so.

This article reflects federal tax law and published guidance as of July 27, 2026. Treasury and the IRS have this area under active review and had issued no guidance on 351 ETF exchanges as of that date, so the rules may change. State tax treatment differs. This is general education, not tax, legal, or investment advice for any specific person. Confirm current law and discuss your circumstances with a qualified advisor before acting on any strategy described here.