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Concentrated Stock

Exchange fund vs. 351 exchange, and the other ways out

Six common ways to reduce a concentrated stock position, side by side: how each works, what happens to the tax, and what it costs you in flexibility.

An exchange fund pools one concentrated stock with other investors' stocks and defers the gain, but generally requires about seven years before you receive a diversified basket. A Section 351 exchange moves a diversified basket of appreciated securities into a new ETF without an immediate tax bill, but no single stock can exceed 25% of what you contribute, and since IRS Rev. Rul. 2026-20 the deferral holds only if the ETF keeps what you contribute. Direct indexing, staged sales, charitable gifts, and hedging are the other common routes.

How the options compare

Scroll sideways on a phone. General features only; terms vary by sponsor and situation.

Option	How it works	Tax at the start	Liquidity	Eligibility	Main risks and costs
Exchange fundLearn more →	Contribute your stock to a private partnership holding many investors' stocks; you own a share of the pool.	Gain deferred; basis carries over. Exiting before about seven years generally returns your original shares.	Illiquid for roughly seven years.	Private placement, typically for qualified purchasers ($5M+ in investments), with some funds open to accredited investors, and sizable minimums; the fund must hold at least 20% in qualifying illiquid assets such as real estate.	Long lockup, ongoing fees, and you own the pool's mix rather than a diversified index of your choosing.
Section 351 ETF exchangeLearn more →	Contribute a basket of appreciated securities to a newly launching ETF in exchange for its shares.	Gain deferred if the ETF keeps your contributed securities; basis and holding period carry over into the ETF shares.	ETF shares trade daily, but selling them realizes the deferred gain.	The basket must pass the 25/50 test: no issuer above 25%, the top five issuers no more than 50% combined.	IRS Rev. Rul. 2026-20 (September 2026) taxes conversions where the ETF swaps out contributed securities, and further guidance may apply retroactively; limited sponsor choice and timing; returns follow the ETF's strategy.
Direct indexing with tax-loss harvestingLearn more →	Own an index's stocks directly and harvest losses that can offset gains from selling the concentrated stock over time.	Sales are taxable; harvested losses help offset them, subject to wash-sale rules.	Fully liquid.	A taxable account with enough capital to hold many individual stocks.	Loss availability depends on markets; tracking error; the concentrated position shrinks gradually, not at once.
Staged sales on an agreed scheduleLearn more →	Sell a set amount each year against an annual tax budget, often coordinated with vesting and income.	Taxable as sold; spreading sales across years can keep more gain in lower brackets.	Fully liquid.	None.	You keep single-stock risk on the unsold shares while the plan runs.
Charitable gifts (donor-advised fund or charitable remainder trust)Learn more →	Give appreciated shares held over a year to a donor-advised fund, or to a charitable remainder trust that pays you income.	No capital gains tax on the donated shares; a deduction is available within IRS limits.	The gift is irrevocable; a charitable remainder trust pays an income stream.	Charitable intent; trusts require an attorney and have setup costs.	Irrevocable; deduction limits and trust rules apply.
Hedging (collar or prepaid variable forward)Learn more →	Use options or a forward contract to limit downside on shares you keep.	Can trigger constructive-sale or straddle rules if structured too tightly.	Shares stay pledged or subject to the contract until it ends.	Larger positions; dealer or broker agreements for forwards.	Costs, capped upside, counterparty risk, and complex tax treatment.

September 2026 IRS guidance on 351 exchanges

On September 28, 2026, the Treasury Department and the IRS issued Revenue Ruling 2026-20 and Notice 2026-62. The ruling treats a “conversion” as a taxable exchange when, as part of the same plan, the new ETF redeems an authorized participant (a market maker) with the securities you contributed and ends up with a materially different portfolio.

The Notice says further guidance could apply retroactively and could identify these transactions as listed transactions. It expresses no view on using Section 351 to seed a new ETF with assets that fit its strategy and are expected to be kept, and it says partnerships used to feed a 351 conversion are also under review. If you are considering a 351 exchange, or have already completed one, review it with your CPA or tax attorney.

Which one fits?

The answer usually combines more than one. Staged sales on an agreed schedule and tax-loss harvesting in a diversified portfolio are the core of The Rubric Unwind. Exchange funds and 351 exchanges are third-party vehicles with their own sponsors, terms, and eligibility rules; we can help you evaluate whether one fits alongside the rest of your portfolio. Hedging and charitable strategies depend on your goals and are reviewed with your CPA and attorney.

To see the tax cost of selling now versus over several years, try the Concentrated Stock Tax Calculator.

Common questions

What is the difference between an exchange fund and a 351 exchange?

An exchange fund can accept a single concentrated stock (subject to the sponsor's acceptance) into a private partnership and generally requires about seven years before you can leave with a diversified basket. A Section 351 exchange converts an already diversified basket of appreciated securities into ETF shares, which trade daily, but no single stock can exceed 25% of what you contribute.

Do exchange funds or 351 exchanges eliminate capital gains tax?

No. Both defer the gain: your cost basis carries over, and selling later realizes the deferred gain. Under current law, heirs may receive a step-up in basis at death.

Did the IRS change the rules for 351 exchanges?

Yes, for one version. IRS Revenue Ruling 2026-20 (September 2026) treats a 351 "conversion" as a taxable exchange when the new ETF soon redeems an authorized participant with the securities you contributed and ends up with a materially different portfolio. Notice 2026-62 says further guidance could apply retroactively, and it expresses no view on seeding a new ETF with assets it intends to keep. Review any 351 exchange with your CPA or tax attorney.

Can I put a single stock into a 351 exchange?

Not by itself. The contributed portfolio must pass a diversification test: no single issuer above 25% and the five largest issuers no more than 50% combined. A concentrated stock can be part of a larger basket.

Who can invest in an exchange fund?

Exchange funds are private placements, typically limited to qualified purchasers ($5M+ in investments), with some funds open to accredited investors, sizable minimums, ongoing fees, and a lockup of about seven years.

Sources

Educational comparison only, not personalized investment, tax, or legal advice. Exchange funds, Section 351 ETF exchanges, and prepaid variable forwards are offered by third parties and involve their own fees, risks, and eligibility requirements. Rubric Advisors does not prepare tax returns or provide legal advice; tax and legal decisions are made with your CPA and attorney. All investing involves risk, including possible loss of principal.