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An investor has held the XYZ for over 20 years. The XYZ company then spins off the ABC company. Over one year after the spin off, the investor sells his shares in the ABC company. It is my claim that the sale of the ABC stock should be reported on the 1099 as a long term transaction with unknown cost basis. However, the broker is reporting it as a short term transaction with unknown cost basis.

If is correctly shown as a long term gain on the tax return then I am thinking that this is a red flag for the IRS. Please comment.

Bob

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    I think that it's LTCG but I that's opinion not fact. There are a number of web sites that go into spin off accounting. FWIW, here's one that addresses the cost basis (and I'm not claiming that it's a definitively correct answer): accountingweb.com/tax/individuals/… – Bob Baerker Feb 10 at 2:03
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    Regarding the title: Do note that when it comes to investment transactions, "short" and "short-term" have totally different meanings. – Ben Voigt Feb 10 at 2:24
  • @BobBaerker I do not see how it can be short term since the investor held the spin off for more than one year. – Bob Feb 10 at 14:57
  • This is a corporate action. The spin off date will be the base date to calculate gains and new cost basis. The overall event can be reported on 1099 with different flavors decided by the broker and the company ABC/XYZ. Please see 2 options that how company can report transactions on 1099: 1st option ) Report the capital gains received due to spin off on the deal closure. The broker should report a gain and adjust the cost price of the ABC share. 2nd option) Broker can adjust the cost price of the new ABC share so that it will be reported on 1099 when the shareholders sells shares in future.. – Abs Feb 15 at 13:02
  • Two notes. First, because XYZ was held for more than 20 years, the cost basis may not be known to the broker - this would appear as "uncovered" and would be why the spin-off ABC is also uncovered with an unknown basis. Also, it is not uncommon for a 1099 to come out, say, early February and be replaced by a "corrected" version in March, April, or even later. It happens to me almost every year. You can certainly file using the corrected long-term disposition; you may have to provide proof but the 1099 should show an acquisition date so that should be easy. – Istanari Feb 15 at 15:08
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Sorry, couldn’t add more comments above to ask questions. Hence, giving you an answer. Please also see my comment above.


To find out how the cost price was adjusted you should be looking into the scheme documents published by the ABC company.

To answer your question, it is brokers responsibility to provide cost basis of shares you held. Hence you can complaint and try to get the 1099 statements corrected by the broker at the soonest.

The long or short term transactions are decided by the broker holding your shares. Again it depends totally on how the corporate action was planned and executed.

  • As correctly commented by Istanari, the (US) broker must track and report basis only for 'covered' lots, which are those bought in or after a cutoff year that varies from 2011 to 2016 depending on the security type. In most cases the holding period for a spinoff is the same as the underlying, not the spinoff date -- in this Q 'over 20 years ago' (and thus not covered) -- but the details of the action matter so yes the key point is to look at the documentation provided by the company, almost always on their website under 'investor relations'. – dave_thompson_085 Feb 15 at 17:32

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