People who have massive capital gains (like @intercst or @OrmontUS ) have a way to exempt capital gains from tax. This one is new to me - I never heard of it before.
The Tax Strategy for People Suffering From Stock-Market Success
If big gains on stocks have locked you in place, here’s one way to break free
By Jason Zweig, The Wall Street Journal, July 17, 2026
…
Exchange-traded funds offer a potential solution. In what’s called a 351 exchange, you can contribute shares of one or more stocks—or ETFs, for that matter—to the launch of an ETF. In return, you get shares of the newly minted ETF with the same total value.
You no longer own the original stock directly; it’s become part of the diversified basket of stocks held by the new ETF. You won’t owe capital-gains tax until you sell the ETF. You’d then owe tax on the difference between what you paid for the original stock and what you sell the new ETF for.
Holding indefinitely is also an option. If the new ETF goes into your estate, your heirs will inherit it at its market value on your date of death. That “step up” would effectively erase most of the long-term, capital-gains tax liability…
Under federal law, for you to be able to defer capital-gains tax in a 351, a single issuer’s stock can’t exceed 25% of the portfolio you contribute to the ETF, and five stocks can’t exceed 50% of your total. Cash doesn’t count in the calculations… [end quote]
Of course, anyone planning to use this should research it in more depth and discuss it with any tax or financial advisors.
Exchange contracts for diversification have been available for a while. Financial stability of the issuer has to be a concern. An ETF Looks like a better choice.
Let’s say I bought ETF “XYZ” that meets 351 exchange requirements. Once I’m an owner of “XYZ,” can I turn around and sell it the next day for whatever the market will pay? Would the capital gain/ loss from that next-day sale be the only reportable event?
I looked at it sometime back… not sure if your gains are < $10M. Instead, I started preparing my wife to be ready for the tax bill, and talking about booking around 5% of gains every year. These conversations are not going anywhere, the moment discussion gets to the tax we will be paying…
The joys of gains evaporate when you consider taxes.
Yes, if you can work down gains under low capital gains rates, why not.
If you are talking abt $10MM, that is difficult. Diversification and letting heirs inherit at stepped up basis can be best strategy. But you can also get stuck w 40% or more estate tax.
The way I see this strategy most often used is for employees that received a significant amount of their compensation (and now their net worth) in a single stock and have now left the company (or in some cases, still employed).
Think of all those newly minted SpaceX millionaires. They don’t want to realize all those gains but they also don’t want to be so heavily concentrated in a single stock. This is a way, over time, to both diversify and to reduce some of the tax lability.
Note, exchanges funds require you to be an accreditedinvestor so this strategy is not available to all investors.
Also replying to no one in particular, all this really does is allow you to change the form of ownership without triggering a taxable event. If you want to realize the gain, you still have to pay the tax when you sell the ETF.
The article clearly states that the cost basis of the etf shares are the same as the cost basis of your original stock. The advantage of a 351 exchange is diversification. The tax rules are not magically suspended. You still retain the step up basis on death, whether it’s the original stock or the etf.
Not if you’re booking a $1 MM capital gain. You’d be paying 20% plus the 3.8% Medicare tax and if you’re over 65 and on Medicare about $13,000 in IRMAA penalties for you and your spouse.
These schemes allow you to diversify your portfolio without incurring a sale and capital gain. It would be attractive to a retiring corporate executive (or multi-millionaire engineer) with most of his net worth in company stock.
You’re delaying taxation. But you can eliminate it by holding to death and letting your heirs get the stepped up cost basis.
First of all there is no 10% slap, it is 0%, 15%, & 20%. Also, your income, short-term gain, interest, dividends, if they are together above $50K for a single filer or 100 K MFJ, will push you into 15% bracket.
Not sure where you get this idea. I didn’t complain about taxes, rather when you factor taxes, it is not as joyful.
There’s another route to avoid those capital gains.
Make a charitable contribution with the appreciated stock. You don’t have to recognize the gain and you get a contribution deduction for the current FMV of the stock.
However, the deductible amount of your contribution is limited to 30% of your AGI rather than the usual 60% of AGI limit. Any excess can be carried over to the next 5 years - with the 30% limit still applying to the future years.