Exchange funds

I don’t get the idea behind exchange funds deferring taxes for a single concentrated holding.

If the stock has a low cost (tax) basis, and he contributes with the stock to the fund and gets a prorate share based on its market value, then the unrealized tax base shifts to the fund instead and tax liabilities are distributed among the fund shareholders?

The idea, more than anything, is to achieve the goal of a diversified portfolio. So he does not have to sell the shares in the concentrated position to obtain a diversified portfolio. He can simply do that by using the exchange fund. Therefore, no tax liability arises because there is no need for one (as the portfolio is diversified with the exchange fund).


When he sells then ?

Transferring the shares to an exchange fund is not considered a taxable event.

When he sells the basket of securities, do they have a low cost basis?

Presumably, yes.

The cost basis would be the cost basis of the assets that were transferred to the fund. To the extent that those assets have a low cost basis, the basket of securities will have a low cost basis.