Can investors legally swap stocks directly to avoid capital gains tax? (AAPL for SPY)

This is a great question about a potentially complex tax situation. While it might seem like a clever workaround, unfortunately, a direct swap of securities between parties is still considered a taxable event by the IRS. The IRS views this as two separate transactions: you selling your AAPL shares (even though no cash changed hands) and then purchasing SPY shares from the other party. Your friend would be considered as selling SPY and buying AAPL. Both of you would recognize capital gains or losses based on your original cost basis in the securities being transferred. This concept falls under what tax professionals call "constructive sale" rules - essentially, the IRS looks at the economic reality of what happened rather than the specific mechanics of how it happened. There are some limited exceptions for tax-free exchanges in the tax code (like certain business reorganizations, like-kind exchanges for real estate prior to 2018), but unfortunately stock swaps between individuals don't qualify for these exceptions.

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There's actually a specific provision in the tax code that might be relevant here - IRC Section 1036 allows for tax-free exchanges of certain securities, but it's VERY limited. It primarily applies to exchanges of stock/securities in the same corporation, or exchanges of insurance policies. Unfortunately, exchanging AAPL for SPY definitely doesn't qualify for this exception. The only truly tax-free exchanges for investment assets these days are for specific retirement account rollovers or 1031 exchanges for real estate. If you're dealing with substantial amounts like the $1M+ mentioned, it's probably worth consulting with a tax attorney who specializes in investment taxation rather than trying to DIY this kind of strategy.

I wonder if gifting could be a solution? Like if Person A gifts AAPL to Person B, and Person B gifts SPY to Person A? I know there's an annual gift tax exclusion amount (like $17k per person I think?).

Just to add another perspective on this - I work in portfolio management and see clients ask about this type of swap arrangement fairly regularly. The bottom line is that there's really no way around recognizing the capital gains when you want to change your investment allocation between different securities. However, there are some timing strategies that can help minimize the tax impact. If you have other positions with unrealized losses, you could harvest those losses in the same tax year to offset some of the gains from selling AAPL. Also, if you don't need to make the swap all at once, you could spread the transactions across multiple tax years to potentially stay in lower capital gains tax brackets. Another option to consider is if either of you have tax-advantaged accounts (401k, IRA, etc.) where you could make some of these swaps without immediate tax consequences. Obviously this depends on your specific account structures and contribution limits. The key thing is to run the numbers on your total tax situation before making any moves. Sometimes paying the capital gains tax now is actually better than trying to avoid it, especially if you expect to be in higher tax brackets in the future.