Tax on Stocks Exchanged Through a Merger & Acquisition

If a company you've invested in goes through a merger or an acquisition, you may find some unfamiliar shares residing in your brokerage account. Payment in the form of stock -- so many shares of the acquiring company for shares of the purchased company -- is a common feature of these transactions. Although you've legally disposed of your old shares, the Internal Revenue Service doesn't look on it as a sale -- yet.

No Gain, No Loss

If you trade old shares for new through a merger or acquisition, the IRS does not look on the event as a taxable transaction. It doesn't matter whether the shares are preferred, common or private; nor does it matter whether the trade was voluntary on your part or if you voted for it. Your original investment has not been disposed of, as far as tax liability is concerned, and no capital gain or loss has to be reported.

Basis Old and New

For capital gains purposes, your basis in the new stock is the same as your basis in the old one. If you paid $5,000 for 100 shares of Company 1 and received 10 shares of Company 2 in the process of a merger with Company 1, your basis in the 10 shares is $5,000. According to the IRS rules, you're now holding 10 $500 shares, and any capital gain or loss occurs when you decide to sell them. If you receive cash in the deal, you report that amount to the IRS as a gain; but if the total gain from the deal -- in cash as well as stock -- was less than the cash you received, you report the lesser amount.

Long-Term and Short-Term Gains

The ordinary rules of long- and short-term gains apply to shares acquired through a merger or acquisition. If you've held the old shares and the new shares for more than a year, the lower long-term tax rate (15 percent in for 2013 tax filing) applies to any gain on sale of the new shares. If your time frame was shorter, then the short-term rate applies; that rate is whatever your own marginal tax rate is.

Spinning Off

Spinoffs sometimes occur when companies reorganize and sometimes on their own. They can complicate your tax life a bit. When a company spins off a division, shareholders may receive stock in the new entity. The company will announce that the spinoff represents a divestment of a certain percentage of the company. For example, the new shares may represent 10 percent of the parent company. If you've invested $1,000 in the parent company, your basis in the new shares is $100, and your basis in the old shares now stands at $900. These would be the amounts to report to the IRS if and when you sell either old or new shares.

About the Author

Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.

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