About $21 billion of stock has moved into new ETFs since December 2024 without anyone paying a capital-gains bill. The rule behind it is older than the ETF: contribute property to a new corporation in exchange for its shares, and no gain is recognized. An ETF is a corporation, and a portfolio with a large embedded gain is property.
- A sponsor announces a new ETF Instead of seeding it with cash, it invites investors to contribute stock portfolios.
- You contribute your portfolio The stocks go in at your cost basis. You receive ETF shares with that same low basis. No sale, no gain.
- The ETF now holds your low-basis lots Along with everyone else's.
- The in-kind mechanism does the rest Over time the ETF hands the lowest-basis lots to redeeming trading firms and recognizes no gain. Your embedded gain leaves the fund untaxed.
- You hold one ETF position Still with your original low basis. Sell it and the gain is due; hold it and the estate step-up applies as usual.
The two tests
The contribution has to be a diversified portfolio, or the exchange is taxable. No single position may be more than 25% of what you contribute, and the top five positions may not be more than 50%. Funds you contribute are looked through to their holdings. A portfolio built from broad index funds passes easily; a portfolio dominated by one employer’s stock does not, which is why concentrated positions go to exchange funds instead.
The numbers so far
The first two launches in December 2024 and April 2025 took in $27 million and $98 million of stock at roughly half those values in cost basis. By August 2026 the count was 113 funds and about $21 billion, with several large fund families joining in 2026. There is no conversion fee to the contributor; the ETF’s expense ratio, 0.2% to 0.6%, is the ongoing cost.
Why the IRS has not said yes
No ruling, letter, or case blesses the transaction. Sponsors rely on their own counsel’s opinions. The risk they disclose is the step-transaction doctrine: if the contribution and the later in-kind purge are really one planned diversification, the IRS could treat them as a sale. In July 2026 a Treasury official said publicly that the in-kind rule “was not designed to cleanse a portfolio contributed as part of a planned diversification transaction”; the fund industry’s trade body has asked for formal guidance and, as of September 2026, has none. The site’s watchlist tracks it.
Who it fits
A diversified portfolio with a large embedded gain whose owner wants a different exposure without a tax bill, and who can accept a legal position that has not been tested. For a portfolio already in broad index ETFs, the gain is small: the destination wrapper behaves like the one you are leaving.