351 exchanges can be especially helpful for simplifying complex portfolios.
Some custodians may require investors to be under an advisory account in order to process the exchange. If you’re unsure, reach out to our team - we’re happy to help.
After the 351 exchange, your original cost basis and purchase dates are preserved. Instead of owning a basket of stocks and ETFs, you now hold a single ETF — but your tax history carries over.
That means your tax basis remains intact, and there's no need to manually track the conversion.
In the days leading up to the ETF launch, the contributing assets will be transferred into the new fund. Final compliance checks ensure all portfolios meet IRS diversification requirements.
On launch day, your contributed assets are exchanged for ETF shares and sent back to your custodian.
Expect to see the new ETF shares in your account within 1–2 business days. Tax lot information is also returned to custodians shortly after and will be reflected in your account records.
We didn’t just adopt the 351 exchange structure - we helped define it. Alpha Architect is the recognized leader in syndicated 351 exchanges, offering an established and operationally tested platform. We’ve built a turnkey ecosystem that simplifies every step of the process - from tax-lot uploads to onboarding paperwork and advisor support.
With Alpha Architect, you're not just investing in a product — you're partnering with the team that made 351 exchange investing accessible, understandable, and scalable.
Our team is committed to making the process as simple and smooth as possible. We provide onboarding tools, webinars, and a dedicated support team.
Enter portfolios, upload tax data, and complete paperwork in the contribution tool.
Understand the process and sign paperwork.
Section 351 allows a company to restructure into a newly formed corporation, e.g., a newly-created ETF. Provided specific tests are met, shareholders may transfer ownership from one entity to another without recognizing gains at the time of transfer.
No. Section 351 has been part of the Internal Revenue Code (“IRC”) since 1954.
Before Section 351, transferring business assets to a corporation in exchange for shares of a newly formed corporate stock triggered capital gains taxes on any appreciated assets. Congress recognized that imposing capital gains for such a transfer did not create any real economic gains, as the owner was merely changing the structure, not exiting, the business.
So, to make it easier for these business owners to expand to a corporate structure and raise
Capital. Congress added Section 351 to the IRC in 1954’s tax code modernization effort.
Ineligible assets include restricted and illiquid securities (e.g., private equity, venture capital, restricted stock), derivatives (options, futures, swaps), cryptocurrencies, and physical commodities. Additionally, ETFs that are not structured as RICs, such as commodity pools, grantor trusts (e.g., GLD), and partnerships, are generally ineligible.
Alpha Architect will bear the administrative costs of facilitating the 351 Exchange.Â
A simplified example can illustrate these mechanics without getting too technical.Â
Suppose a client holds three ETFs – let’s say ETFs A, B, and C. ETF A has two tax lots, ETF B has one tax lot, and ETF C has three tax lots for a total of six tax lots. The combined value of the portfolio is $1,250,000 at a cost basis of $810,000. The investor contributes the three ETFs with six tax lots into the new structure.Â
In return, they receive the newly formed ETF. Critically, the original six tax lots transferred to the fund are unchanged. The only change is that instead of holding ETFs A, B, and C, the client now holds one ETF with the same tax lot history.
The cost basis and value of positions are retained on a tax-lot-by-tax-lot basis. After conversion into the new ETF, each tax lot maintains its original cost basis and holding period.
Â
The 351 exchange maintains the tax-lot structure, preserving flexibility to select highly appreciated positions for charitable gifting post-conversion.
One key requirement for a 351 Exchange is that the contributed assets must be diversified before the exchange. The IRS applies a 25/50 diversification test, meaning no single security can exceed 25% of the portfolio, and the weights of the top five holdings cannot exceed 50% of the total value.
If one only holds single stock positions, this is a simple calculation. However, ETFs can be used in a 351 Exchange, and that calculation can become a little more onerous.
One example would be 30% of a portfolio invested in a US large-cap ETF. While this would seem to exceed the 25% threshold and disqualify the portfolio from participating in a 351 Exchange, it does not. Fortunately, ETFs are evaluated on a “look-through” basis for diversification testing. Meaning, the weights of the stocks within the ETF is considered for the 25/50 test rather than evaluating the weight of the ETF holding. In this example, let’s say Apple has a 7% weight in the ETF. From a portfolio perspective, the ETF would be contributing 7%*30% = 2.1% of Apple into the 351 Exchange. We would add any other Apple positions, directly or indirectly (such as through other ETFs), to get the final Apple position weight for the 25/50 diversification tests.Â
Return and portfolio composition for 351 exchange funds will generally resemble a Large-Cap strategy. They also includes a strategic dividend management feature. At times, the fund may replace certain holdings about to declare a dividend. In our view, bias towards dividends creates a mispricing opportunity. As a result, the fund may have lower distributions than peer US market funds.
Alpha Architect is a high-conviction ETF issuer, meaning that we only create and launch a fund if our team believes in the idea. On that point, Alpha Architect has never closed an ETF in our 10+ year history.Â
Investors. We do our best to manage business risk, both in our product offering, pricing, and business practices. While we’re biased, we’re confident in our fighting ability to survive the rigors of competing in this highly competitive space. Transparency is one of our core values.Â
For anyone concerned, we encourage you to contact us with all questions about Alpha Architect. Email info@alphaarchitect.com to schedule a call.
