Corporate Actions

Stock Splits

Stock Splits are where you end up with more shares than you previously had, but at a lower price (or less shares than you previously had at a greater price in the case of a reverse split).

Stock Splits are normally not taxable (subject to some exceptions) because your economic position as a shareholder generally doesn't change as a result. The company issues more shares to each shareholder based on the number of shares they own. The total capitalization of the company and the ownership percentage of each shareholder doesn't change, so the value of your holding is unchanged.

Most brokers do not properly report stock splits in their trade history as there is no consistent format of how these are reported from one broker to the next. So most trade accounting software programs do not adjust for stock splits automatically.

However, TradeLog features an Adjust for Stock Split function which enables investors to make the necessary adjustment in a few easy steps. This function will change the number of shares owned as well as the price of these shares, thereby changing the cost basis of each share while the total amount paid for all of your open shares remains the same.

Stock Spin-Offs

Occasionally a company will spin off shares in another company to all of its shareholders. Basically the entire transaction is a zero sum event in which the total cost basis of all the shares owned after the spin-off equals your total cost basis in the shares owned before the spin-off.

So if your cost basis for 100 shares of stock XYZ is $10 per share going into the spin-off, your total cost basis for these 100 shares is $1,000.

If XYZ spins off 1 share of ABC for every 10 shares that you own of XYZ, then your total cost basis for all of these shares, 100 shares of XYZ plus 10 shares of ABC still equals $1,000.

If the price of the 10 shares of ABC you received from the stock spin-off is $4 per share, then your total cost basis for these 10 shares is $40. This amount must be then subtracted from your total cost basis of your original 100 shares of XYZ. These are now worth only $960. Therefore, your price per share for XYZ is now $960 divided by 100 shares or $9.60 per share.

This can get really complex, especially when you own many shares purchased at many different prices and you need to figure out your new cost basis in the shares that you are left with after the spin-off, or if the company spins off shares in several different companies.

Stock Mergers

Occasionally a company will purchase shares of another company and merge the two companies into one, sort of like a reverse spin-off. So if you owned shares in the company that was bought, those shares no longer exist and you now own shares in the parent company instead. As shown above, your total cost basis for these new shares does not change, only the quantity and price of those shares will change.

TradeLog helps active traders generate accurate tax reporting.

Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Cogenta Computing, Inc. does not make investment recommendations nor provide financial, tax or legal advice. You are solely responsible for your investment and tax reporting decisions. Please consult your tax advisor or accountant to discuss your specific situation.