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Author: makfan Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 942  
Subject: Re: taxing split shares Date: 12/9/1999 3:52 PM
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OK, here is the tax information on stock splits, directly from IRS publication 550, p. 40-42. You can download a PDF version of this at

http://www.irs.gov/forms_pubs/pubs.html

Stock dividends are distributions made by a corporation of its own stock. Generally, stock dividends are not taxable to you. If the stock dividends are not taxable, you must divide your basis for the old stock between the old and new stock.

New and old stock identical. If the new stock you received as a nontaxable dividend is identical to the old stock on which the dividend was declared, divide the adjust basis of the old stock by the number of shares of old and new stock. The result it your basis for each share of stock.

Example. You owned one share of common stock that you bought for $45. The corporation distributed two new shares of common stock for each share held. You then had three shares of common stock. Your basis in each share is $15 ($45 / 3). If you owned two shares before the distribution, one bought for $30 and the other for $45, you would have six shares after the distribution--three with a basis of $10 each ($30 / 3) and three with a basis of $15 each ($45 / 3).


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Stock splits. Figure the basis of stock splits in the same way as stock dividends if identical stock is distributed on the stock held.

So there you have it: when you get a split, you must adjust your cost basis by the split factor. If you start with 100 shares at $10, and then participate in a 2:1 split so that you have 200 shares, the cost basis is $5 per share. If you then sell 100 shares (leaving you with 100 shares in your account), you cannot treat the cost basis as 100 @ $10, you must treat the basis as 100 @ $5.

If your accountant did the former, incorrect basis calculation, you may be required to file an amended tax return.

Finally, commissions on buys and sells are included in the cost basis calculation. They must be spread evenly among all shares acquired or sold in each transaction.

Mike
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