“Spin off stocks are a great investment” says your best friend. Your recent promotion has made tax implications a concern, so you wonder, what is the cost basis of spinoff shares? Read on and discover what you need to know …
What is the Cost Basis of Spinoff Shares?
The cost basis of spinoff shares is the shares taxable value. The taxable value is used to calculate capital gains or losses when the shares are sold. Here’s how it works:
Original Investment Allocation – A percentage of an investor’s original parent company investment is allocated to the newly received spinoff shares. The allocation percentage is based on the original parent company investment’s fair market value and the spinoff shares fair market value at the time of share receipt.
Distribution Date Fair Value – The spinoff share’s market value is its market price. The spinoff share’s market value, on the distribution date, is used to calculate the initial cost basis.
Corporate Actions Adjustment – Corporate actions such as mergers, acquisitions, peripheral divestitures, and lien transfers may financially impact the spin off. Cost basis adjustments are made to reflect these special situations.
Tax Documentation – What is the cost basis of a spinoff shares? The parent firm and/or the spin off provides tax reporting documents to their shareholders. The tax information details the individual company allocations essential for tax return cost basis reporting on any spinoff shares sold.
What is the cost basis of a spinoff shares? It is the value attributed to spinoff shares and is used for accurate capital gain or loss tax reporting.
How Do I Calculate Cost Basis for a Spin-off?
You calculate the cost basis for a spin-off by determining the spinoff share value. Here’s how to calculate the cost basis:
Allocation Ratio Determination – The allocation ratio is the portion or percentage of your original parent firm’s cost basis allocated to the value of the spinoff shares. As stated previously, the ratio is based on the fair market value of the original parent company investment and the spinoff share’s fair market value on the date of distribution.
Spin Off Cost Basis Calculation – Calculate the spin off cost basis using the following equation:
Spin Off Costs Basis = (Allocation Ratio) x (Parent Firm Investment Original Cost Basis)
Corporate Action Adjustment Application – Apply all special circumstances adjustments to the spin off cost basis. Cost basis adjustment may entail increasing or decreasing the cost basis to include changes in price per share, share ownership, or fractional share distribution. The adjustment will reflect an updated cost basis value or an investment structural change.
Calculation Documentation – Maintain precise cost basis calculation records. Document the allocation ratio and the derivation used to make any adjustments. This is not only important tax information, but accurate records will make tax reporting easier.
Cost Basis Reporting – Upon the sale of your spinoff shares, report the cost basis on your tax returns. This cost basis will determine your capital gain or loss on your share sale.
What is the cost basis of a spinoff shares? The cost basis of a spinoff shares is the spinoff share value used to determine the applied taxes on the capital gains or losses when the shares are sold.
Read next: Is a Spinoff considered a Dividend?
