Stocks (options, splits, traders)

A stock split occurs when a company creates additional shares, thus reducing the price per share. If you own stock that has split and now own additional shares, you must adjust your basis per share or per the lots of the stock you own.

If the old shares of stock and the new shares are uniform and identical:

• Allocate the basis of the old shares to the old and new shares.
• Determine the per share basis by dividing the adjusted basis of the old stock by the number of shares of old and new stock.

If you purchased the old shares in separate lots for differing amounts of money (a different basis per share in different lots):

• Allocate the adjusted basis of the old stock between the old and new stock on a lot by lot basis. Example: Suppose you have 200 shares of XYZ Inc. common stock. You initially bought 100 shares at $10 per share. You later bought another 100 shares at $12 per share. XYZ Inc. announces a two for one stock split and issues you 200 additional shares. You update your records. The first lot of 100 shares is now 200 shares. Your total basis in the 200 new shares is the same $1,000 basis you had in the 100 shares before the split. The new per share basis is $5 ($1,000/200 = $5). Similarly, your second lot of 100 shares is now 200 shares. Your total basis in these 200 new shares is $1,200, the same as your basis in the 100 shares before the split. The new per share basis is $6 ($1,200/200 = $6).

• Tax Topic 409 - Capital gains and losses
• Tax Topic 703 - Basis of assets
• Publication 550, Investment Income and Expenses (Including Capital Gains and Losses)

The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees. When selling securities, you should be able to identify the specific shares you are selling.

If you can identify which shares of stock you sold, your basis generally is:

• What you paid for the shares sold plus any costs of purchase.

If you can't adequately identify the shares you sold and you bought the shares at various times for different prices, the basis of the stock sold is:

• The basis of the shares you acquired first, then the basis of the stock later acquired, and so forth (first-in first-out). Except for certain mutual fund shares and certain dividend reinvestment plans, you can't use the average basis per share to figure gain or loss on the sale of stock.

Each security you buy is considered a covered security. The broker is required to provide you basis information on the Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. For each sale of a covered security for which you receive a Form 1099-B, the broker will provide you the following information: the date of acquisition (box 1b), whether the gain or loss is short-term or long-term (box 2), cost or other basis (box 1e), and the loss disallowed due to a wash sale (box 1g) or the amount of accrued market discount (box 1f).

The law requires you to keep and maintain records that identify the basis of all capital assets.

• Topic 409 - Capital gains and losses
• Publication 550, Investment Income and Expenses (Including Capital Gains and Losses)

When dividends are reinvested on your behalf and used to purchase additional shares or fractions of shares for you:

• If the reinvested dividends buy shares at a price equal to their fair market value (FMV), you must report the dividends as income along with any other ordinary dividends.
• If you're a member of a dividend reinvestment plan that lets you buy more stock at a price less than its FMV, you must also report as dividend income the FMV of the additional stock on the dividend payment date.

Report your reinvested dividends with your other dividends, if any, on Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors. You must complete Schedule B (Form 1040) and attach it to your Form 1040 or Form 1040-SR, if your ordinary dividends (in box 1a of Form 1099-DIV, Dividends and Distributions) and your reinvested dividends are more than $1,500.

Note: Keep records of the amount of the reinvested dividends, the number of additional shares purchased and the purchase dates. You'll need this information to establish your basis when you sell the shares.

• Tax Topic 404 - Dividends
• Publication 550, Investment Income and Expenses (Including Capital Gains and Losses)

An investor must include in income the amount received as a dividend. A dividend reinvestment plan uses the amount received as a dividend to purchase additional shares or fractional shares of the same stock, usually at the fair market value of the stock on the day reinvested. Therefore, the basis of stock that you received through a dividend reinvestment plan is the cost of the shares plus any adjustments, such as sales commissions:

• If you haven't kept detailed records of your dividend reinvestments, you must reconstruct those records with the help of public records from sources such as the media, your broker or the company that issued the dividends.
• Determine the basis by using the first-in first-out (FIFO) rule if you can't specifically identify which shares you sold.
  • FIFO rule means:
    • You use the basis of the shares you acquired first as the basis of the shares sold. In other words, you sold the oldest shares you owned first.
    • You need to have kept adequate documentation of all your purchases, including those that were made through the dividend reinvestment plan, in order to establish the basis of these shares.
    • Even if you sold the oldest shares you owned first, under certain circumstances, you may elect to use average basis rather than the actual basis of the shares you acquired first to determine the basis of those shares you acquired pursuant to a dividend reinvestment plan.

• Tax Topic 703 - Basis of assets
• About Publication 551, Basis of Assets
• Publication 550, Investment Income and Expenses (Including Capital Gains and Losses)

A § 423 employee stock purchase plan is a type of statutory stock option plan. If you participated in an employee stock purchase plan:

• You don't include any amount in your gross income as a result of the grant or exercise of your option to purchase stock.
• You may have to report compensation on line 1a of Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors and capital gain or loss on Schedule D (Form 1040), Capital Gains and Losses and Form 8949, Sales and Other Dispositions of Capital Assets when you sell the stock. If your employer or former employer doesn’t provide you with a Form W-2 or if the Form W-2 doesn’t include the amount in box 1, report this amount on Schedule 1 (Form 1040) PDF, line 8k.
• The amount of compensation and capital gain or loss depends on whether you satisfy the holding period requirement.
• • You satisfy the holding period requirement if you don't sell the stock until the end of the later of:
    • The 1-year period after the stock was transferred to you, or
    • The 2-year period after the option was granted

You should receive a Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c) from your employer when the employer has recorded the first transfer of legal title of stock you acquired pursuant to your exercise of the option. This form will assist you with the tracking of your holding period and your cost basis for the stock purchased through your qualifying plan.

• Stock options
• Publication 525, Taxable and Nontaxable Income
• Tax Topic 427 - Stock options

Under a § 423 employee stock purchase plan, you have taxable income or a deductible loss when you sell the stock. Your income or loss is the difference between the amount you paid for the stock (the purchase price) and the amount you receive when you sell it. You generally treat this amount as capital gain or loss, but you may also have ordinary income to report.

You must account for and report this sale on your tax return. You have indicated that you received a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. You must report all 1099-B transactions on Schedule D (Form 1040), Capital Gains and Losses and you may need to use Form 8949, Sales and Other Dispositions of Capital Assets. This is true even if there's no net capital gain subject to tax.

You must first determine if you meet the holding period. You meet the holding period requirement if you don't sell the stock until the end of the later of:

• The 1-year period after the stock was transferred to you, or
• The 2-year period after the option was granted.

If you meet the holding period requirement:

• You can generally treat the sale of stock as giving rise to capital gain or loss. You may have ordinary income if the option price was below the stock's fair market value (FMV) at the time the option was granted.

If you don't meet the holding period requirement:

• The ordinary income that you should report in the year of the sale is the amount by which the FMV of the stock at the time of purchase (or vesting, if later) exceeds the purchase price. Treat any additional gain or loss as capital gain or loss.

If you meet the holding period requirement and the option price was below (but not less than 85% of) the FMV of the stock at the time the option was granted:

• You report as ordinary income (wages) on line 1a of Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors the lesser of (1) the amount by which the stock's FMV on the date of grant exceeds the option price or (2) the amount by which the stock's FMV on the date of sale or other disposition exceeds the purchase price. Your employer should report the ordinary income to you as wages in box 1 of Form W-2, Wage and Tax Statement. If your employer (or former employer) doesn't provide you with a Form W-2, or if the Form W-2 doesn't include the income in box 1, report the income on line 8k of Schedule 1 (Form 1040) PDF for the year of sale or other disposition.
• If your gain is more than the amount you report as ordinary income, the remainder is a capital gain reported on Schedule D (Form 1040) and, if required, on Form 8949.

If you don't satisfy the holding period requirement and sell the stock for less than the purchase price, your loss is a capital loss but you still may have ordinary income.

You should receive a Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c) from your employer when the employer has recorded the first transfer of legal title of stock you acquired pursuant to your exercise of the option. This form will assist you in tracking your holding period and figuring your cost basis for the stock purchased through your qualifying plan.

• About Publication 551, Basis of Assets
• About Publication 525, Taxable and Nontaxable Income
• Tax Topic 427 - Stock options

For most taxpayers, Form 1099-B, Proceeds From Broker and Barter Exchange Transactions should match Form 8949, Sales and Other Dispositions of Capital Assets. You must declare any difference on your return.

There may be other times when your broker reports a basis that's inconsistent with your records. The instructions for Form 8949 advise you on how to make this basis adjustment to report your taxes correctly. For more specific rules, refer to Publication 550, Investment Income and Expenses and the Instructions for Form 8949.

• Tax Topic 409 - Capital gains and losses

No. In a stock split, the corporation issues additional shares to current shareholders, but your total basis doesn't change. Following a stock split, you must reallocate your basis between the original shares and the shares newly acquired in the stock split.

• Stock splits don't create a taxable event; you merely receive more stock evidencing the same ownership interest in the corporation that issued the stock. You don't report income until you sell the stock.
• Your overall basis doesn't change as a result of a stock split, but your per share basis changes. You'll need to adjust your basis per share of the stock.
  • For example, you own 100 shares of stock in a corporation with a $15 per share basis for a total basis of $1,500. In a 2-for-1 stock split, the corporation issues an additional share of stock to the shareholder for each share the shareholder owns. You now own 200 shares, but your total basis is still $1,500. Following the stock split, you must reallocate your basis between the original shares and the shares newly acquired in the stock split. Your basis per share is now $7.50 ($1,500 divided by 200) for each of the 200 shares.

• Tax Topic 409 - Capital gains and losses
• Publication 550, Investment Income and Expenses (Including Capital Gains and Losses)