How to Put Stock Splits on Your Taxes
Sometimes companies will execute what is called a stock split. When this is done, a shareholder of the company's stock will receive a certain number of shares for every share that they currently hold. From a tax standpoint, a stock split is considered a dividend given by the company. The question often arises as to how stock splits affect the shareholder's taxes. It can be somewhat confusing but with the proper amount of study the confusion will begin to disappear.
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Instructions
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Understand that stock splits generally do not require the stockholder to pay taxes on fair market value for the new stock. Fair market value is the current trading price for the stock. There are generally no taxes owed when the stock is split, only if and when shares are sold. The holding period for the new stock is the date the old stock was purchased.
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Calculate the cost basis for the shares being sold. The cost basis is how much each share cost the shareholder. To determine the cost basis divide the total number of shares (old plus new) by the total amount paid for the shares (cost of old shares plus brokerage fees).
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Consider the following example. One hundred shares of X corporation was bought for $20 a share plus a $20 brokerage fee. The total investment is $2,020. The stock splits two for one making the total number of shares 200 and the average share price $10.10 ($2,020 divided by 200).
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Calculate the capital gains on the stock sold by subtracting the cost basis for each share from the price at which the shares were sold. If the cost basis is $10.10 and the shares were sold at $20.10 then the gain which would be taxable for each share sold would be $10. These gains would be reported on schedule D of the shareholder's tax return.
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Understand how fractional shares work with regards to taxes. Companies do not issue fractional shares so if the stock split creates fractional shares the company simply pays the stockholder fair market value for the fractional share and sends them a check. For example if the shareholder has 57.5 shares after the split and they paid a total of $580.75, including brokerage fees, then the cost basis for each share would be $10.10 ($580.75 divided by 57.5). If the fair market value that the company paid for the half share was $9.10 then the gain that the shareholder needs to report would be $4.05 ($9.10 minus $5.05).
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