IRS Targets Section 351 ETF Conversions Used to Avoid Capital Gains Taxes

The US Treasury and IRS have launched a crackdown on aggressive tax-avoidance strategies, targeting Section 351 ETF conversions used by wealthy investors to defer capital gains taxes. Under newly issued guidance and revenue rulings, transactions swapping appreciated stock into ETFs may be recharacterized by their economic substance and treated as taxable exchanges, triggering immediate tax liabilities. The measures threaten an ETF conversion industry that has raised between $21 billion and $23 billion, while Treasury Secretary Scott Bessent warned that further rules could apply retroactively, impacting hedge funds and asset managers including Dimensional, Eagle Capital, Brown Advisory, and Sequoia.