Treasury reviews 351 ETF exchanges amid tax planning scrutiny

The US Treasury Department is taking a hard look at one of Wall Street’s favorite tax tricks, and the findings could reshape how investors think about ETFs as tax-planning vehicles. At least 87 funds launched through Section 351 exchanges are now under review, collectively managing around $18 billion in assets. What Section 351 exchanges actually do Section 351 of the Internal Revenue Code allows investors to transfer appreciated securities into a newly created corporation, in this case an ETF, in exchange for shares of that fund. The key benefit: no immediate capital gains tax bill. In English: imagine you bought a bunch of stocks years ago that have since skyrocketed in value. Selling them would trigger a massive tax hit. But contributing them to a new ETF through a Section 351 exchange lets you swap into a diversified fund while kicking the tax obligation down the road. Your cost basis carries over, meaning you only owe capital gains when you eventually sell the ETF shares. The strategy gained serious traction starting in 2021. Strong equity markets meant investors were sitting on enormous unrealized gains, and financial advisors spotted an opportunity to pair an old tax code pr...