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.
You won't owe taxes on your swapped stocks until you sell them.
Stock Swap Taxation
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.
For capital gains purposes, your basis in the new stock is the same as your basis in the old one. A good cash merger example is 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.
Exceptions for Spinoffs
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.
2018 Taxes and Long-Term Rates
The taxes you pay depends on how long you held the swapped stock before you sold it. 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 applies to any gain on sale of the new shares. For 2018, most taxpayers will pay 15 percent long-term capital gains taxes. If your time frame was shorter, then the short-term rate applies; that rate is whatever your own marginal tax rate is, which, again, is likely 15 percent.
If you're still filing your 2017 taxes and you're wondering about the cash and stock merger tax treatment for that tax season, it's similar to every other year. Assuming you sold the stocks during the 2017 tax year, you'll pay tax at the capital gains rate, which will probably be 15 percent regardless of how long you held the stock before selling it.