When Capital Gains Become Gravity: Why a 351 Exchange Matters
After more than a decade of strong markets, many investors face an unexpected problem: portfolios weighed down by unrealized capital gains.
Selling to rebalance? That could trigger a steep tax bill. Tech workers with concentrated stock holdings, long-term investors with decades-old winners, and family offices managing legacy portfolios know the challenge well.
The success that once propelled portfolios forward can eventually become gravity - pulling portfolios down, making it harder to adjust or diversify. Fortunately, there’s a way to lighten the load: a Section 351 exchange.
What’s a 351 Exchange?
Section 351 of the Internal Revenue Code, if certain criteria are met, allows appreciated assets to be transferred into an ETF in exchange for shares of the fund without triggering immediate capital gains tax.
For SMAs with appreciated holdings, this means you may be able to convert those assets into an ETF structure tax deferred. Done correctly, it unlocks diversification, efficiency, flexibility, and scalability.
A 3-5-1 Guide to 351 Exchanges
1. Are your clients’ portfolios anchored by appreciated positions that limit flexibility?
2. Would converting SMAs into a custom ETF improve efficiency and scalability?
3. Who has the expertise to guide you through the process without missteps?
5 Things to Know About a 351 Exchange
• Tax deferral: Transfer appreciated assets without triggering capital gains.
• ETF efficiency: Benefit from in-kind creations/redemptions and fewer taxable events.
• Operational simplicity: Consolidate multiple SMAs into one scalable ETF.
• Customization: Design ETFs aligned with client goals, sectors, or ESG priorities.
• Marketability: ETFs may offer more liquidity and visibility than SMAs.
1 Reason to Use Exchange Traded Concepts
Because ETC was the first white-label ETF issuer in the world, we have the experience and know-how to launch your custom ETF via 351 Exchange. ETC recently ecxecuted one of the largest and most complex 351 exchanges in the industry. We bring the lawyers, auditors, administrators, and decades of experience to ensure your exchange is seamless, compliant, and efficient.
What This Means for You
For money managers and family offices, a 351 exchange isn’t just a technical move, it’s a strategic unlock. By converting SMAs into ETFs through ETC, you can defer taxes, streamline operations, and open new doors for growth.
Give your clients “351” reasons to win. It all starts with ETC. Contact us here to book a strategy session.
Exchange Traded Concepts, LLC (“ETC”) is an SEC Registered Investment Adviser. ETC presently offers two lines of business, the first being the provision of white-label ETF services, that include investment advisory and administrative platform services, and the second is offering its portfolio management services on a stand-alone basis to other advisers managing funds that have a need for a specialized trading sub-adviser familiar with and skilled in trading on behalf of an ETF and other investment vehicles. ETC provides the trust, board, and decades of experience to offer asset managers (hedge, SMAs, mutual) and others an efficient, cost-effective means to leverage the benefits of the ETF wrapper. ETC’s Form ADV can be found here https://adviserinfo.sec.gov/firm/summary/151197
