Yes, but only for transactions that follow Section 351’s ordinary requirements. Treasury and the IRS did not eliminate in-kind ETF seeding. Their September 28, 2026 guidance targets arrangements that contribute appreciated securities, quickly create ETF units and then redeem those units for a materially different portfolio while claiming no current gain.
The practical result is a sharper dividing line: a conventional seed using assets that fit an ETF’s stated strategy may still qualify, while a prearranged portfolio swap faces recharacterization as a taxable exchange.
As an Amazon Associate I earn from qualifying purchases.
What the IRS issued on September 28, 2026
Notice 2026-62 and Revenue Ruling 2026-20 were released together. The notice asks for comments on novel investment-fund transactions that may produce tax results inconsistent with federal law. It says later guidance could take the form of regulations, notices, revenue rulings, listed-transaction or transaction-of-interest treatment, and could apply prospectively or retroactively. Written comments are due October 28, 2026, according to InvestmentNews’ September 29 report.
Free tools Windows power users keep installed
One-click scans. No signup required.
Revenue Ruling 2026-20 addresses a planned sequence rather than every Section 351 ETF transaction. Investors contribute appreciated securities to a new ETF. The ETF issues creation units to an authorized participant in return for securities aligned with the ETF’s investment thesis, or cash used to buy those securities. The ETF then redeems the units with the investors’ original securities. The IRS says the substance is a taxable exchange between the contributing investors and the authorized participant, not a qualifying Section 351 contribution to the ETF.
The notice also says Treasury and the IRS intend to target specific abusive transactions, minimize compliance burdens and respect market expectations for conventional, long-established planning consistent with congressional intent.
How a conventional Section 351 ETF seed works
Section 351(a) generally provides nonrecognition when property is transferred to a corporation solely for its stock and the transferors are in control immediately after the exchange. Section 351(e) limits that treatment for transfers to an investment company, which is why the portfolio’s composition and the parties’ control matter.
Rank #2
Assets must match the fund’s investment thesis
The contributed securities should be assets the newly established ETF is designed to own. The IRS notice expressly says it is not addressing a Section 351 transaction that seeds a new ETF with assets consistent with its investment thesis and that the ETF intends and expects to retain, absent a substantial change in circumstances.
Control is tested immediately after the exchange
The transferors must satisfy the control requirement immediately after the exchange. A transaction planned so that another party effectively receives the investors’ economic portfolio, rather than the ETF retaining the contributed assets, creates a materially different fact pattern from ordinary seeding.
Diversification limits the concentrated-stock scenario
For the investment-company limitation, the notice explains that diversification is generally measured as no more than 25% of portfolio value in any one issuer and no more than 50% in five or fewer issuers. That is why a single highly appreciated company holding is not the ordinary fact pattern. Tim Steffen, managing director and director of advanced planning at Baird Private Wealth Management, told InvestmentNews that clients often assume they can exchange one concentrated position for an ETF, but the portfolio generally must be diversified.
Conventional seed versus the targeted conversion structure
| Question | Conventional Section 351 seed | Structure addressed by Revenue Ruling 2026-20 |
|---|---|---|
| Do contributed assets fit the ETF’s thesis? | Yes; the assets are selected for the strategy the ETF is launching. | The ETF issues units for different, thesis-aligned securities or cash, then returns the investors’ original securities. |
| Does the ETF intend to retain the assets? | Yes, absent a substantial change in circumstances. | The planned redemption indicates the original assets are not intended to remain in the ETF. |
| Are control and diversification requirements addressed? | They must be satisfied under Section 351 and the investment-company rules. | Those formal steps do not cure a prearranged exchange that has the substance of a portfolio swap. |
| Is there a rapid creation-and-redemption sequence? | Not as a prearranged method for replacing the contributed portfolio. | Yes; the sequence is central to the IRS’s characterization. |
| Expected tax result | Potential nonrecognition if all statutory requirements and facts support it. | The IRS treats the transaction as a taxable exchange between investors and the authorized participant. |
| Minimum investment and fund history | Minimums are often substantial, and a new fund has no operating history to evaluate. | The same practical limitations apply, with the added risk that the structure may be recharacterized. |
| Effect of future guidance | Further guidance could still affect transactions and may be prospective or retroactive. | The notice specifically contemplates guidance aimed at these or similar arrangements. |
What this means for someone with appreciated stock
A Section 351 exchange is not a general one-stock-for-an-ETF conversion. A portfolio containing one issuer at more than 25% of value, or five or fewer issuers at more than 50% in aggregate, may fail the diversification framework described in the notice. Meeting a percentage test also does not make a prearranged redemption sequence acceptable.
Steffen said minimum investments are usually larger than many clients are willing to commit, and newly launched funds have no operating record to assess. Investors therefore have to evaluate both tax mechanics and ordinary fund risks: strategy fit, portfolio construction, liquidity, expenses, governance and the possibility that the product will not behave as expected after launch.
He also gave the central economic warning: “This is simply a tax deferral technique. It’s not a tax elimination technique.” The built-in gain does not disappear; the timing of recognition is the potential benefit. A later sale or other taxable event can bring the deferred gain into income.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Why the market is watching the guidance
More than 100 ETFs have been seeded in kind under Section 351 since 2021, representing more than $40 billion in current assets under management, according to the Tax Alpha Insider tracker in 2026 as reported by InvestmentNews. An earlier InvestmentNews report on September 29 cited more than $20 billion in launch assets for more than 100 ETFs seeded since 2021, also citing that tracker. Those figures describe different points in time—current assets versus assets at launch—and should not be treated as interchangeable.
The scale explains why the notice matters beyond one transaction. Existing sponsors, authorized participants, advisers and investors must distinguish long-standing seeding practices from arrangements designed primarily to exchange a concentrated appreciated portfolio for a different one without immediate gain recognition.
Questions to resolve before considering a transaction
- What exactly will the ETF own? Map every contributed position to the fund’s written investment thesis and portfolio limits.
- Will the ETF retain those assets? Document the expected holding period and identify what circumstances, if any, would justify a later sale or redemption.
- Do the transferors meet the control test immediately afterward? Confirm ownership and control with transaction-specific tax analysis.
- Does the portfolio satisfy the diversification framework? Test the 25% single-issuer and 50% five-or-fewer-issuer limits using the relevant values at the exchange.
- Is any creation and redemption prearranged? A planned sequence that substitutes a materially different portfolio is the fact pattern Revenue Ruling 2026-20 treats as taxable.
- Can the economics withstand a tax recharacterization? Model the capital-gains result if the IRS treats the transaction as an exchange rather than a nonrecognition contribution.
- Has an independent specialist reviewed the documents? A qualified CPA, tax attorney or fiduciary adviser should review the actual agreement, fund documents and investor circumstances before execution.
Steffen said Baird does not offer Section 351 products and that clients and advisers he has walked through the details generally concluded the strategy was not a fit, although that does not mean it can never be appropriate. He also cautioned: “If you’re going to promote a product that has tax advantages, you need to understand the disadvantages too. How can these things go right and how can they go wrong?”
Crashes, No Sound, or Screen Glitches?
Random freezes, missing sound and display glitches usually trace back to one bad driver. Find and replace yours safely.Free scan · under a minuteWindows Errors? Fix Them Before They Spread
Repair common Windows errors and clear accumulated junk for a smoother, more stable PC - no reinstall needed.Free scan · no reinstallQuick Recap
Product prices and availability are accurate as of the date/time indicated and are subject to change. Any price and availability information displayed on Amazon at the time of purchase will apply.
