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How the 351 conversion can defer or reduce capital gains taxes
The strategy involves folding appreciated stocks into an ETF, then delaying taxes until the investor sells the ETF shares, with outcomes depending on the later income bracket.
Yahoo Finance says wealthy investors have increasingly used tax strategies they view as legal to manage capital gains tax exposure, including a technique known as a "351 conversion." The article frames the broader debate, noting capital gains taxes are seen by supporters as a reliable revenue source for governments, while opponents argue they can reduce investment and create a lock-in effect in which investors hold appreciated assets longer than they otherwise would.
According to Yahoo Finance, a 351 conversion allows investors to defer and/or reduce capital gains taxes by moving individual stocks into an exchange traded fund (ETF), where they then hold ETF shares rather than the original stocks. The article says ETF creation and redemption can occur through in kind transactions, which can bypass the taxes that would apply if an investor sold the individual appreciated shares.
Yahoo Finance adds that the tax bill does not automatically vanish, it is deferred to the date the investor sells the ETF shares. The eventual amount still depends on the difference between the original invested amount and the money taken out later, and the article notes investors may pay less if they withdraw in a lower income bracket.