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Concept · Funds, wrappers and fees

What is a Section 351 ETF seeding?

Direct answer Launching an ETF by having investors contribute existing stock portfolios in exchange for fund shares, with no gain recognized under IRC §351. The portfolio must be diversified (no position over 25%, top five under 50%). The ETF then sheds the low-basis lots through in-kind redemptions. 113 such funds and about $21 billion by August 2026, with no IRS ruling.

Sponsors rely on private legal opinions. The risk they disclose is the step-transaction doctrine, and a Treasury official named the practice publicly in July 2026. Read Section 351: moving a portfolio into an ETF without selling.

Sources

  1. IRC §351law.cornell.edu
  2. 351.tax, launch tracker351.tax

Used in

Exchange funds, for one big stock Contribute one concentrated stock to a partnership, receive a slice of everyone's, pay no tax, wait seven years. The fee is 0.4% to 0.95% a year, and a fifth of the fund is real estate by law. One rule holds up the ETF tax advantage, and Treasury is looking at it As of September 2026 nothing pending changes the ranking of the levers. One live item: Treasury has said it is examining the in-kind mechanism behind every ETF's tax edge. A dated watchlist. Section 351: moving a portfolio into an ETF without selling Since December 2024, 113 ETFs have launched by taking in investors' stock portfolios for shares, no gain recognized, about $21 billion so far. The two tests, and why the IRS has not said yes.

Related concepts

Exchange fundIn-kind redemptionStep-up in basis

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