Strategies
Seven ways to beat the tax bill.
The code sections that make each one work, and the situations where each one fits.
Which strategy fits your situation
| Your situation | Exchange fund | Long/short | Direct index | §351 ETF | Hedge | Tax-managed fund | Charitable |
|---|---|---|---|---|---|---|---|
| One large stock with a low basis | Fits | Fits | Partly | No | Partly | No | Partly |
| A diversified portfolio with a low basis | Partly | Fits | Fits | Fits | No | No | Partly |
| New cash, and large gains elsewhere every year | No | Fits | Fits | No | No | Partly | No |
| New cash, and you want low maintenance | No | No | Partly | No | No | Fits | No |
| Shares you must keep: insider rules, a lockup, or a step-up | No | Partly | No | No | Fits | No | No |
| You plan to give to charity | No | No | Partly | No | No | No | Fits |
A general guide only. Your amounts, basis, horizon, and investor status change the answer. Run the calculator for numbers →
01
Exchange funds
Swap a concentrated stock for a share of a pooled, diversified partnership without a sale.
- Fits
- Qualified purchasers with one large, low-basis stock who can wait seven years.
- Watch for
- Funds close names that they already hold too much of, and a redemption before year seven returns your own stock. IRS Notice 2026-62 asks for comments on exchange funds that later convert to an ETF under §351.
How it works
- 1You contribute shares in kind to a limited partnership. Many investors do the same, so the pool holds hundreds of names.
- 2The contribution is not a sale, so no gain is recognized. Your old basis carries over to your partnership units.
- 3At least 20% of the fund sits in illiquid assets, usually real estate, so the partnership is not an investment company for tax purposes.
- 4After seven years you can redeem for a diversified basket of stocks, still at your old basis.
The rules
| IRC §721 | No gain on a contribution of property to a partnership. |
|---|---|
| IRC §721(b), Treas. Reg. §1.351-1(c) | The investment-company exception, avoided with a 20% non-marketable sleeve. |
| IRC §704(c)(1)(B), §737 | The seven-year window for distributions of contributed property. |
02
Tax-aware long/short
Add leverage and short positions to a direct index so that it produces far more harvestable losses.
- Fits
- Investors with other cash to commit who want to unwind a position over months, not years, or who have large gains every year.
- Watch for
- Financing and trading costs are real, the embedded gain in the account grows, and results depend on the manager's alpha. In 2026, Fidelity paused new long/short accounts and Schwab raised its minimum to $10M.
How it works
- 1The account holds a long book above 100% and a short book, for example 130/30 or 250/150, so net market exposure stays near 100%.
- 2Both books turn over. Long lots that fall and short lots that rise are closed for losses and replaced with similar names.
- 3The realized losses offset gains from a gradual sale of a concentrated stock, or gains elsewhere in your tax return.
- 4Most managers run this as a separately managed account at a prime broker or custodian.
The rules
| IRC §1091 | The wash-sale rule: a substitute security must not be substantially identical. |
|---|---|
| IRC §1233 | Short-sale rules for the holding period and character of gains. |
| IRC §1211, §1212 | Capital losses offset capital gains, then $3,000 of ordinary income, then carry forward. |
03
Direct indexing
Own the stocks of an index directly so that each losing lot can be sold for a tax loss.
- Fits
- Taxable investors with new cash, regular gains to offset, or charitable plans for appreciated lots.
- Watch for
- A long-only account runs out of losses after a few years in a rising market.
How it works
- 1The account buys several hundred stocks to track an index such as the S&P 500.
- 2When a lot falls below its cost, the software sells it and buys a similar stock, so the index exposure stays.
- 3The banked losses offset gains elsewhere. Loss yield is highest in the first years and falls as the basis of the account drops.
- 4Many platforms can take an existing stock portfolio and transition it over time.
The rules
| IRC §1091 | The wash-sale rule: no repurchase of a substantially identical security within 30 days. |
|---|---|
| IRC §1211, §1212 | Capital-loss limits and carryforwards. |
04
§351 ETF conversions
Contribute an already diversified portfolio to a new ETF in kind and receive ETF shares at your old basis.
- Fits
- Investors with a diversified but low-basis portfolio, often old mutual funds or many separate stocks.
- Watch for
- A single stock cannot pass the 25% test. Rev. Rul. 2026-20 (September 2026) taxes a conversion where the ETF soon redeems the contributed stocks out for a different portfolio.
How it works
- 1Investors contribute stocks or funds to a new ETF at launch, in exchange for its shares.
- 2The exchange is tax free if the contributed portfolio is already diversified.
- 3Inside the ETF, in-kind redemptions let the manager remove low-basis lots without a taxable distribution.
The rules
| IRC §351(e) | Transfers to an investment company are taxable unless the portfolio is diversified. |
|---|---|
| IRC §368(a)(2)(F)(ii) | The diversification test: no issuer above 25%, and the top five at or below 50%. |
| IRC §852(b)(6) | No gain to the fund on in-kind redemptions. |
05
Hedging and monetization
Keep the stock, but limit its downside with options, and borrow against it if you need cash.
- Fits
- Holders who must keep the shares, such as insiders or people who wait for a step-up, but cannot carry the full risk.
- Watch for
- A hedge does not diversify, and a tight collar can trigger a constructive sale.
How it works
- 1A collar buys a put and sells a call, often at zero net premium.
- 2A prepaid variable forward pays you most of the value now and settles in shares later.
- 3A loan against the hedged position gives cash without a sale.
The rules
| IRC §1259 | A hedge that removes almost all risk and reward is a constructive sale. |
|---|---|
| IRC §1092 | Straddle rules defer losses and can suspend the holding period. |
06
Tax-managed funds
Pooled funds and accounts that are managed to keep taxable distributions low.
- Fits
- Investors who want low-maintenance, low-cost tax efficiency.
- Watch for
- Losses inside a fund cannot be passed to you.
How it works
- 1The manager avoids short-term gains, harvests losses inside the fund, and favors low-dividend stocks.
- 2Municipal bond strategies give income that is exempt from federal tax.
The rules
| IRC §852 | A regulated investment company passes gains and dividends to shareholders. |
|---|---|
| IRC §103 | Interest on state and local bonds is excluded from federal income. |
07
Charitable vehicles
Give appreciated stock to a trust or fund, so the sale happens without capital-gains tax.
- Fits
- Holders who already plan to give a part of their wealth to charity.
- Watch for
- The gift is irrevocable, and your heirs do not receive the remainder.
How it works
- 1A charitable remainder trust sells the stock tax free, pays you an income for years or for life, and gives the rest to charity.
- 2A donor-advised fund takes the stock, gives you a deduction now, and grants it out later.
The rules
| IRC §664 | Charitable remainder trusts are exempt from income tax. |
|---|---|
| IRC §170 | The deduction for gifts of appreciated property at fair market value. |