Skip to navigationSkip to main contentSkip to right columnADVERTISEMENTLara CriggerWed, June 10, 2026 at 11:22 PM GMT+2 6 min readETF Investing ToolsAfter nearly two decades of rising markets, you—like many investors—may be sitting on a portfolio brimming with unrealized capital gains. Great for your net worth. Terrible for your tax bill.When the stock market appreciates considerably, long-term investors can counterintuitively find themselves frozen by their own success, unable to trim back or otherwise sell out of lucrative positions without triggering a major tax event. As a result, they’re de facto prevented from finding cheaper strategies, reducing portfolio concentration, or adjusting their asset allocation to fit their evolving goals and risk tolerance.Enter the 351 ETF conversion. This nifty quirk of the IRS code allows investors to shift appreciated investments into an ETF structure without immediately triggering capital gains tax.351 conversions are rapidly gaining attention as a deft way to maneuver the double-edged sword of success. According to Tax Alpha Insider’s Brent Sullivan, 82 351 ETFs have been seeded by individual investors with $16.6 billion of assets.That might seem like a drop in the bucket now. So were ETF inflows, once upon a time.What Is A 351 Conversion?Originally designed to facilitate corporation formation, Section 351 has existed in the U.S. tax code for roughly a century.The code allows for investors to contribute their property, such as stocks and ETFs, to a newly formed corporation as an in-kind exchange. (In-kind exchanges are transactions in which equivalent assets change hands without a sale taking place, i.e., shares for shares. You might recall in-kind exchanges as the backbone of ETF creation/redemption and what makes the structure so tax-friendly.)Since most ETFs technically exist as “registered investment companies,” some issuers have begun adapting the 351 code to launch ETFs using securities. (Read More: “An Investor’s Field Guide to ETF Structures”)Here’s how it works: An investor owns a stock portfolio in, say, a separately managed account. Those shares of stock are contributed to form a new ETF; in return, the investor receives the newly created ETF shares. The investor’s original cost basis carries over, and no capital gains are realized.It’s important to note that the investor hasn’t eliminated their tax burden, just deferred it. But a 351 conversion enables investors to move assets into new strategies in a tax-efficient way. Over time, the ETF managers may be able to then offload stock shares with a lower cost basis via creation/redemption.Why Are 351 Conversions Taking Off Now?If Section 351 has been around for nearly a century, why are we only seeing 351 conversions take off now?Terms and Privacy PolicyPrivacy & Cookie SettingsMore Info