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Section 351 exchange rules drive new ETF launches and tax planning
Section 351 conversions allow investors to contribute appreciated securities to newly formed ETFs without triggering an immediate taxable event, a feature increasingly used as new ETF issuance grows.
Yahoo Finance interviews independent tax management expert Brent Sullivan on why so many new ETFs are being launched using the Section 351 exchange process. The outlet says the provision of the U.S. tax code, when certain conditions are met, can let appreciated securities be contributed to a newly formed ETF without triggering an immediate taxable event.
The discussion focuses on potential benefits for investors holding concentrated stock positions, who may want to diversify while managing capital gains exposure. The article notes that while Section 351 has existed for decades, ETF issuers have only recently begun applying it more actively to the creation of new ETFs.
Sullivan also argues that investors should not rely on tax efficiency alone when choosing an ETF. He says using Section 351 can make allocations easier, but it does not justify an ETF if the fund itself does not offer a compelling investment reason beyond tax considerations.
The piece adds that there will likely always be investors with appreciated assets, even if markets decline, though it suggests broader market conditions could affect the pace of activity.
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