Taxation of Split Stock Sales
Stock splits do not add value to your bottom line, and therefore have no impact on the size of your tax bill. For example, you may own 100 shares of Stock Z at $50 per share, prior to a two-for-one stock split. After the stock split, you would own 200 shares of Stock Z at $25 per share. Before and after the stock split, you would still own $5,000 worth of Stock Z. After selling the stock in the future, you will enter split-adjusted prices on your tax paperwork.
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Identification
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When making stock market investments, you will be responsible for paying taxes on dividends and realized capital gains. While holding shares of stock, you collect dividends as investment income from corporate profits. Realized capital gains, however, occur when you sell shares of stock at a profit. As of 2010, realized capital gains can be taxed at maximum 35 percent rates. For tax-free capital gains, you must own shares of stock for more than one year, and earn less than $34,000 as a single filer.
Realized Capital Gains
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When calculating realized capital gains, your cost basis and proceeds will account for brokerage commissions. For example, you may sell 200 shares of Stock Z for $45 per share in December, after the stock had split in May. When trading stocks, your online broker charges you $10 in trading commissions. Proceeds from your sale would therefore be $8,990 ($45 x 200 shares = $9,000 - $10 brokerage commissions = $8,990). In March of that year, you had bought 100 shares of Stock Z for $50 per share, before the May stock split. Your cost basis would then be $5,010 ($50 x 100 = $5,000 + $10 brokerage commissions = $5,010). You would then owe taxes on $3,980 in realized capital gains ($8,990 - $5,010).
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Tax Paperwork
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You will attach IRS Schedule D to Form 1040 when reporting your realized capital gains. When completing Schedule D, you will use split-adjusted prices to calculate your acquisition costs. With Stock Z, you originally bought 100 shares at $50 before the stock split. On Schedule D, however, you will claim that you bought 200 shares at a split-adjusted price of $25. Your cost basis would still be $5,010 ($25 x 200 = $5,000 + $10 brokerage commissions).
Dividends
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In terms of dividends, the stock split has no bearing on your tax bill or paperwork. Dividends are classified as ordinary and qualified dividends. Ordinary dividends are taxed at 10, 15, 25, 28, 33 and 35 percent rates, while qualified dividends are either tax-free or taxed at a 15 percent rate. For qualified dividends, you must own stock for more than 61 out of the 120-day period surrounding the ex-dividend date. You buy and hold stock before and through the ex-dividend date -- to receive dividends on the next payable date. During tax season, you will receive a 1099-DIV form that categorizes your dividends into ordinary and qualified dividends. You will also include this information on the Schedule D and 1040 forms.
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