Thinking of investing in spin off stocks, you study a company’s spin off prospectus. You wonder, as you review the details, what is the holding period for a spin-off? You turn to the Glossary of Terms section, and this is what you learn.
What is the Holding Period for a Spin-Off?
The holding period of a spin-off is the length of time a shareholder must hold parent company shares to qualify for specific tax treatments on the spin-off company shares. The holding period’s importance is it determines whether the gains or losses on the sale of the spin-off shares will be treated as short-term or long-term taxable events. To answer, what is the holding period for a spin-off? we must dive into key holding period facts:
Spin-Off Holding Period Facts
Spin-Off Tax Treatment – A spin-off must meet the requirements of Section 355 of the Internal Revenue Code to be considered a tax-free transaction. If the spin-off fails to meet the Code’s criterion, the spin-off is a taxable event.
In a tax-free spin-off, shareholders do not incur a tax liability upon receipt of the new spin-off shares but may pay taxes on any gains when the shares are sold. Shareholders of a taxable spin-off will pay taxes on receipt of the spin-off shares and may incur a tax liability on the sale of the shares.
Holding Period Determination – The holding period for tax-free spin-off shares is added to the holding period of a shareholder’s original parent company shares. Another way to look at is the tax-free spin-off holding period begins the same day as the original parent shares holding period. The parent company is the firm divesting, or spinning off, a division or subsidiary to form an independent entity, the spin-off.
The holding period for a taxable spin-off begins the day after the distribution date and is separate from the parent company shares holding period.
What is the holding period for a spin-off? The spin-off holding period is variable based on the tax-free or taxable nature of the spin-off transaction. The holding period for a tax-free spin-off is a parent company shares carryover to the spin-off shares, while a taxable spin-off’s holding period commences the day after the distribution date, independent of the parent shares holding period. This critical distinction is the determinant for the tax treatment of the post-sale gains or losses of the spin-off shares.
What is the Distribution Date for a Spin-Off?
The distribution date for a spin-off is the date when the parent firm distributes the new spin-off shares to its existing shareholders. The shares are distributed according to a shareholder’s current proportional ownership of parent company shares.
The distribution date is a process milestone because this official transfer date has significant implications for tax treatment, market trading commencement, and holding period calculation for tax purposes.
What is the holding period for a spin-off? The spin-off holding period is tax treatment dependent. The distribution date not only determines the holding period for a taxable spin-off, but it has taxation ramifications and post-spin-off trading implications. An investor’s awareness of the distribution date is useful tax planning information.
Read next: How Does Stock SpinOff Affect Tax?
