{"id":35384,"date":"2025-08-21T18:37:08","date_gmt":"2025-08-21T18:37:08","guid":{"rendered":"https:\/\/financialrush.com\/?p=35384"},"modified":"2025-08-21T18:37:08","modified_gmt":"2025-08-21T18:37:08","slug":"how-wealthy-investors-use-etfs-to-avoid-capital-gains-taxes","status":"publish","type":"post","link":"https:\/\/financialrush.com\/?p=35384","title":{"rendered":"How wealthy investors use ETFs to avoid capital gains taxes"},"content":{"rendered":"

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After years of stock market growth<\/a>, many investors are sitting on large profits in taxable accounts, which could trigger hefty capital gains<\/a> when sold.\u00a0\u00a0<\/p>\n

That bill can be significant for wealthy Americans, with a 20% top capital gains rate, plus 3.8% net investment income tax<\/a>, depending on earnings.\u00a0\u00a0<\/p>\n

One solution, known as a 351 conversion<\/a> or exchange, allows higher earners to transform appreciated assets into shares of new exchange-traded funds<\/a>. The strategy seeds ETFs before launch, and the original investor defers capital gains until selling their shares.<\/p>\n

For some investors, the strategy is “like magic,” said certified financial planner David Haas, president of Cereus Financial Advisors in Franklin Lakes, New Jersey.\u00a0\u00a0<\/p>\n<\/div>\n

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More from ETF Strategist:<\/h2>\n
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Here’s a look at other stories offering insight on ETFs for investors.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n

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One of the benefits of the ETF wrapper is that fund managers can accept assets before launch, and later rebalance without incurring gains<\/a>.<\/p>\n

While the volume of 351 exchanges for ETFs has increased in recent years, there are still relatively few public options, experts say.<\/p>\n

Haas has used 351 conversions for certain clients. But there are some downsides to consider, he said. Here are the key things to know.\u00a0<\/p>\n<\/div>\n

How 351 conversions for ETFs work<\/h2>\n
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Many higher earners keep some investments in separately managed accounts, or SMAs, which are taxable, customized portfolios with an active manager.<\/p>\n

One benefit of SMAs is tax-loss harvesting<\/a>, which uses losses to offset portfolio gains. But those opportunities “dwindle over time” as assets grow, said Daniel Sotiroff, a\u00a0senior analyst for Morningstar Research Services.<\/p>\n

Eventually, “there are fewer losses to harvest,” and you can’t change investments without incurring capital gains, he said.<\/p>\n<\/div>\n

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For some, 351 conversions to ETFs could solve the problem, he said.<\/p>\n

Large financial planning firms that manage clients’ SMAs can create a private ETF via 351 conversions. More recently, smaller firms or SMAs can participate in publicly seeded ETFs.\u00a0<\/p>\n

“I wouldn’t be surprised if we see more,” Sotiroff said.<\/p>\n

However, minimum investments are still high. For example, Alpha Architect<\/a> recommends a “minimum portfolio” of $1 million. Cambria Funds<\/a>‘ first 351 ETF conversion launch in December 2024 also had a $1 million minimum for individuals.<\/p>\n<\/div>\n

Your 351 conversion must be ‘diversified’<\/h2>\n
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While deferring capital gains taxes on embedded profits may be attractive, 351 conversions to ETFs have specific rules, experts say.<\/p>\n

“You can’t just put one stock into a 351 exchange and get tax-deferred treatment,” Ben Henry-Moreland, a CFP with advisor platform Kitces.com, told CNBC.<\/p>\n

There are strict diversification requirements<\/a> to qualify for deferred capital gains. Your transferred assets are only “diversified” if:<\/p>\n