Frequently Asked Tax Questions And Answers
Keyword: Stock Split
10.2 Capital Gains, Losses/Sale of Home: Stocks (Options, Splits, Traders)
How do I figure the cost basis of stock that has split, giving me more of
the same stock, so I can figure my capital gain (or loss) on the sale of the stock?
When the old stock and the new stock are identical the basis of the old shares
must be allocated to the old and new shares. Thus, you generally divide the adjusted
basis of the old stock by the number of shares of old and new stock. The result is
your new basis per share of stock. If the old shares were purchased in separate lots
for differing amounts of money, the adjusted basis of the old stock must be allocated
between the old and new stock on a lot by lot basis.
References:
When my stock split, the stock distributed to me was different than my original
shares. How do I figure the basis of the shares of the two different kinds of stock?
Usually, the company issuing the new type of stock will send you a letter explaining
the tax consequences of the stock distribution, including how to calculate the basis
in the two different types of stock.
If you did not get such a letter or would like further assistance, call IRS customer
service at 1-800-829-1040 or refer to Publication 550, Investment Income
and Expense : Stock dividends under Basis
of Investment Property .
References:
How do I calculate the cost basis of the shares that have split and are
later sold from my employee stock purchase plan?
You need to determine what your basis is in the company stock on the date of the
split. The new shares assume part of your basis in the company stock on that date.
You must divide the adjusted basis in the old stock by the number of shares of old
and new stock. The result is your basis for each share of stock.
For example, if you owned two shares of company stock with a basis in one at $30
and the other $45, and the company declares a three for one stock split, you now have
six shares of stock. Three of the shares will have a basis of $10, and three will
have a basis of $15.
Because this is an Employee Stock Option Plan, you may have to report some or all
of the gain on the sale of this stock as ordinary income (wages). For more information
about employee stock option plans, see Publication 525 , Taxable
and Nontaxable Income.
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How will the IRS know my stock split?
The IRS is not notified of a stock split.
It is your responsibility to accurately report your income on your return in the
year you sell shares of stock and to fully disclose details of the sale on Schedule
D. Part of that disclosure is to state the per share basis of the stock sold, which
should take into account a stock split.
The broker of the sale reports the proceeds of the sale to the IRS on Form 1099-B
The 1099-B also shows the recipient's identity, the payer's identity, and the CUSIP
Number that identifies the securities sold.
References:
Does the holding period for new shares I received as a result of a stock
split start on the purchase date of the original stock or on the date of the stock
split?
The holding period of the stock you received as a result of the stock split begins
on the same day as the holding period of the original stock.
References:
I purchased stock through an employee stock purchase plan at my work which
split three months later. Three months after that, I sold the stock at a gain. How
does the split affect how I report the stock sale on my tax return?
With either of the two types of statutory employee stock option plans, there is
no income as a result of the granting of the option or the exercising of the option
(purchasing stock). These two types of plans are the employee stock purchase plan
and the incentive stock option plan. However, if you don't hold the stock long enough
to meet the holding period requirements, when the stock is sold you may have to report
compensation income (wages). The split will affect the computation of capital gain
and compensation income, if any.
For the stock purchased under an employee stock purchase plan to receive favorable
tax treatment, it must be held for at least two years after the stock is granted and
at least one year after the stock is transferred to you. If the holding periods are
not met, the lesser of the fair market value of the stock on the grant date minus
the option price or the fair market value on the sale date minus the amount you paid
for the stock is compensation income (wages). To the extent that the gain is being
taxed as wages on your return, it becomes part of your adjusted basis in the stock
sold. When determining basis, the amount you paid for the stock is divided equally
among the shares received in the split.
For information on incentive stock option plans and nonstatutory stock options,
or more information on employee stock purchase plans, refer to Publication 525, Taxable
and Nontaxable Income
References:
How do I calculate the sale of a stock that had a reverse split?
Reverse splits are where your number of shares in a company's stock decreases.
Your total basis remains the same; it is your per share basis that increases. You
must divide your basis in the old shares by the number of new shares. For example,
you own 4 shares of stock. Two of these shares have a basis of $15; each of the other
two have a basis of $20 each. There is now a one for two reverse split. Now you have
two shares. One has a basis of $30 the other has a basis of $40. If your receive cash
because of the sale of a fractional share you have a capital gain or loss that is
reported on Form 1040, Schedule D (PDF) , Capital
Gains and Losses . Please see Fractional Shares in Publication 550, Investment
Income and Expenses , for further information on the sale of a fractional share.
References:
Do I need to pay taxes on that portion of stock I gained as a result of
a split?
No, you generally do not need to pay tax on the additional shares of stock you
received due to the stock split. You will need to adjust your per share cost of the
stock. Your overall cost basis has not changed, but your per share cost has changed.
You will have to pay taxes if you have gain when you sell the stock. Gain is the
amount of the proceeds from the sale, minus sales commissions, that exceeds the adjusted
basis of the stock sold.
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10.3 Capital Gains, Losses/Sale of Home: Mutual Funds (Costs, Distributions, etc.)
How do I calculate the average cost method of a mutual fund if the fund
price splits?
If your mutual fund splits, or adjusts its price, it is treated like a stock split.
Your total basis doesn't change after the split, but since you now own more shares
without paying any more money, your per-share basis will decrease. To calculate your
per-share basis, divide the total cost that you have invested in the fund (minus any
shares previously sold) by the current number of shares that you hold.
References:
What affect does a stock split for a stock in my mutual fund have on my
cost basis when I am using an average basis method?
If a stock within your mutual fund splits, it has no affect on your basis because
the shares you own are shares in the mutual fund, not in the stock that split.
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