TRUEHAVEN CAPITAL
Section 351 Exchange
A way to diversify a concentrated, low-basis position without selling it, evaluated alongside your own tax counsel.
When selling isn’t really an option
Many families hold a position they cannot comfortably sell. A founder’s stock. An inherited holding with almost no basis. Years of vested equity from a single employer. On paper it is wealth. In practice it is a concentration risk that cannot be unwound without triggering a tax bill large enough to change the decision.
A transaction intended to qualify under Internal Revenue Code §351 is one approach some investors consider: contributing appreciated securities to an exchange-traded fund in a transaction intended to be tax-deferred, in exchange for shares of that fund.
Often called a 351 ETF conversion, it is one way investors look to diversify concentrated stock without selling it, and for some it serves as an alternative to a traditional exchange fund. See how it compares with selling or an exchange fund.
What a §351 contribution may help with
Diversify without selling
Exchange a concentrated position for shares of a broader ETF, rather than selling first and diversifying with what is left after taxes.
Defer the tax, not avoid it
The contribution is intended to be tax-deferred. Your tax counsel can explain how your cost basis and any future gains would be treated.
Stay invested
Your capital remains invested through the exchange instead of moving to cash and waiting to be redeployed.
A simpler position to plan around
One diversified holding can be easier to rebalance, give, and plan around over time than a single concentrated stock.
These are potential outcomes, not assurances. Please review the risks below.
Worth exploring if…
- You hold publicly traded stock, ETFs, or mutual funds that have appreciated significantly
- A single position makes up a large share of your net worth
- Selling would trigger a capital gains bill large enough to change your decision
- You want broader diversification and intend to stay invested for the long term
A §351 contribution is generally not designed for privately held business interests, real estate, or money you expect to need in cash soon.
Holding a concentrated position? Let’s talk through whether a §351 contribution belongs in the discussion.
Book a 30-minute conversationTrueHaven offers two separate and distinct services relating to a §351 contribution.
Advisory
A §351 conversion inside a discretionary advisory relationship
In connection with this service we:
- Assess and advise you on whether to pursue a §351 conversion
- Select the ETF vehicle
- Select the securities and positions involved
- Manage your assets on a continuous basis both before and after conversion
TrueHaven does not manage or advise the ETF itself. The ETF is managed by an unaffiliated third party.
What it costs. Our ongoing asset-based advisory fee under our standard fee schedule. We charge no separate or additional fee for the conversion work — that work is part of the advisory relationship.
Access & Facilitation
Self-directed, with TrueHaven facilitating.
This is a non-advisory service. You direct the transaction on a self-directed basis and provide us with a written attestation of self-direction before we perform the service.
What it costs. A fixed, flat-rate fee for access and facilitation. The fee is earned only if you proceed with a conversion. If you do not convert, no fee is charged.
The Risks
A §351 conversion involves specific risks. The following apply to both services. TrueHaven expresses no view on any tax matter and defers all §351 tax conclusions to your tax counsel.
- Qualification risk
- There is no assurance that a transaction will qualify for tax deferral under §351. If the transaction fails to qualify, it may be treated as a fully taxable event.
- Diversification requirement
- §351 does not apply to a transfer to an “investment company.” To avoid this treatment, the contributed pool generally must satisfy a diversification standard. A single concentrated position generally cannot satisfy this standard on its own; the standard is typically met by pooling different positions contributed by multiple clients. There is no assurance that a diversified pool will be assembled.
- Pre-conversion gain recognition
- Trimming or reallocating a concentrated position in order to meet the diversification standard before contribution may itself trigger recognition of taxable gain, reducing or eliminating the intended benefit for some clients.
- Loss of position-level control
- Following conversion, you no longer hold the individual contributed securities directly and lose the ability to manage or harvest tax losses at the individual position or tax-lot level.
- Liquidity and newly launched fund risk
- A newly organized ETF may experience limited trading volume, wider spreads, or other liquidity constraints, particularly during its formation period.
- No assurance of benefit
- The anticipated tax deferral may not be realized. You rely solely on your own tax counsel for all tax conclusions.
Worth a conversation?
If you’re holding a concentrated position and wondering whether a §351 conversion belongs in the discussion, we’re glad to walk through it with you — including the cases where the answer is no.
TrueHaven Capital, LLC does not provide tax or legal advice. Whether a proposed transaction qualifies under Internal Revenue Code §351, and the tax consequences of the transaction, must be evaluated by the client’s own tax counsel, on whose opinion the client relies. TrueHaven expresses no view on any tax matter. The ETFs used in a §351 conversion are organized and managed by unaffiliated third-party providers; TrueHaven is not affiliated with §351 ETF investment managers and does not manage or advise the ETF. Nothing on this page is an offer to sell or a solicitation of an offer to buy any security, and nothing on this page is a recommendation to any person. All investing involves risk, including the possible loss of principal. Form ADV Part 2A available on request. See our Disclosures page for additional information.