Generally, shares that are received as a result of a stock split are not taxable at the time of the split, but these additional shares of stock must be considered when you decide to sell so you can determine if you had a gain or a loss when it comes time to calculate your tax liability. Therefore, it is important to know the cost basis of your original purchase and how the stock split affects your cost per share.
A stock split could directly influence your overall tax bill, particularly if you decide to sell additional shares of a stock that you have received.
How a Stock Split Works
A stock split by definition replaces share with a greater number of shares. For example, a stock might split 2-for-1, replacing each share with two new shares, or 3-for-2, replacing every pair of shares with three new ones.
When a stock is split, the number of shares of a company increases, but the total value of all shares collectively does not change. Similarly, when you receive shares as a result of a split, the number of shares you own increases, but the total value of your investment remains the same. For example, if you own 100 shares of Company ABC at $50 per share, after a 2-for-1 stock split, you will own 200 shares at $25 per share. Because there is no change in the value of your investment, there is no tax consequence at the time of the split.
Determining Cost Basis
You must calculate the cost basis of your new shares in anticipation of selling them, and of having, at that time, a taxable gain or loss. In the case of a 2-for-1 split, the cost basis of all of your shares is now half of what you originally paid for them. For example, if you purchased 100 shares at $10 per share, the cost basis, after the split, of your 200 shares is $5 per share. You can calculate the stock split cost basis by using the ratio of post-split stock to pre-split.
Taxes on Stocks After a Split
The difference between the cost basis and what you receive from the sale of your shares will determine your taxable gain, if you sold for a profit, or your taxable loss. The cost basis is what you paid for your shares, including any reinvested dividends and fees. This information can usually be found on your brokerage or bank transaction statements. Additionally you will need to know the date you purchased the shares to determine if you held them short term – less than one year – or long term, which means longer than one year.
Long-Term Vs. Short-Term Gains
When calculating capital gain or capital loss, you must determine if the stock was held long term or short term. When you receive additional shares because of a stock split, the new shares are considered to have the same holding period as the original shares. Therefore, if you decide to sell tomorrow all of your shares after a stock split, and the original shares were purchased more than a year ago, the resulting loss or gain would be considered long term. Long term capital gains are generally taxed at a lower rate.
Taxes on Fractional Shares
Sometimes a stock split results in the shareholder owning a fractional share. The company may distribute the value of that partial share to the shareowner in cash. The value of that partial share is compared to the cost basis of the same share portion to determine if there is a capital gain or a capital loss for tax purposes.
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