Every once in a while, I meet an investor who’s “too successful” with a single stock. Maybe it’s Apple, Nvidia, or Tesla — one of those household names that’s grown 10- or 20-fold over the years. It’s an incredible story, but it also creates a problem: how do you diversify without triggering a massive capital-gains tax bill?
That’s where Section 351 of the Internal Revenue Code comes in — a tool few investors (and even fewer advisors) know how to use properly. If you’re dealing with large concentrated stock positions, you’ll want to work in tandem with a tax-planning strategy rather than just an investment reallocation.
The Problem: Concentrated Wealth, Big Tax Bill
When you sell a highly appreciated stock, the IRS expects its cut. For example, if you bought $200,000 worth of stock years ago and it’s now worth $1 million, selling it could create an $800,000 gain — easily triggering six-figure taxes.
So, investors often end up stuck — afraid to sell, yet anxious about being overexposed to one company’s fortunes.
The Solution: Section 351 Exchange
Section 351 offers a creative, tax-deferred way to diversify. Here’s the basic idea:
You and a group of other investors each contribute appreciated stock into a newly formed corporation (often structured as a fund). In exchange, you receive shares of that corporation — not cash — and under Section 351, this transfer is considered a tax-free exchange.
Let’s say 100 investors each contribute $1 million worth of stock. The fund now holds a diversified $100 million portfolio across many companies. You’ve effectively turned your one-stock risk into a professionally managed, multi-company investment — without triggering immediate tax.
No gain.
No loss.
No tax bill today.
The Catch: Cost Basis Carries Over
There’s always a catch — and in this case, it’s that your cost basis carries over. If your original shares had a $200,000 basis and are now worth $1 million, your new shares in the fund retain that same $200,000 basis. You’ve deferred the gain, not erased it. If you eventually sell your fund shares, that gain will still be recognized.
But by deferring taxes, you’ve bought yourself time — time to plan, to let the fund grow, or to explore other exit and estate-planning strategies down the road.
When Section 351 Makes Sense
This type of strategy can be powerful when:
✅ You want to diversify a concentrated position without paying tax now
✅ You’re forming a new business or investment company with others
✅ You’re restructuring existing assets into a corporate entity for efficiency or estate planning
It’s not for everyone. Section 351 requires strict legal and tax compliance, a qualified sponsor, and patience (typically a 7-year holding period). But for investors with multi-million-dollar single-stock exposure, it’s one of the most sophisticated tools available to manage risk while preserving tax efficiency.
If you’re sitting on a concentrated position and wondering what your options are, a Section 351 exchange could be the bridge between diversification and deferral.
Have a concentrated position worth $1M+? Schedule a consultation to explore Section 351 diversification and tax-deferral strategies with one of our advisors? Contact us for a free discovery call.