What is the cost basis of fractional shares closed during stock-split from multiple lots?

Question

I bought shares in XYZ three different times:

1. 2017: +100
2. 2018: +150
3. 2019: +160

At this point, I have a total of 410 shares.

In 2020, the stock split with a ratio of 971 to 1000, which is a multiplier of .971 for all previous lots:

1. 2017: +97.1
2. 2018: +145.65
3. 2019: +155.36

Giving me a total of 398.11 shares. However, the fractional portion (.11) was sold automatically at the current price and cash was deposited into my account. Although the cash value is negligible, it is still considered a taxable event and would like to know how to calculate its cost basis.

Does the .11 shares come from the original lot from 2017 per standard FIFO accounting?

Answer 1

The fractional shares sold as the result of the split are no different than if you had sold those shares on the same date.

So depending on what you instructed your broker, the same will apply to calculate the tax basis.

Most brokers will use FIFO as you mentioned. And in case you can't identify which lot that is, the IRS will consider it to be FIFO (First In First Out).

From https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/stocks-options-splits-traders/stocks-options-splits-traders-1

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.

Answer 2

Calculate your original total cost basis. Divide the original total cost basis by the number of shares you own after the corporate event to determine the new cost basis per share. Multiply this number by the number of fractional shares sold - that is the cost basis of the fractional share sold. Subtract this from the the cash received to determine your capital gain/loss.

Here's an example for a 50% stock dividend (see below). It's not the same circumstances as your situation but the process is the same. If you want a match, google for one.

Many people simply report the payment as sales proceeds with zero cost and pay capital gains tax on the entire amount. The proper method, which also achieves tax savings, is to allocate your adjusted cost basis to the fractional shares and pay capital gains tax only on the gain or loss.

You can use the calculators on this website to compute the cost basis of your fractional share based on the type of transaction that produced it. An "all stock" merger, a "stock & cash to boot" merger, a stock split, or a spinoff can all result in fractional shares.

Here is an example of the actual calculations:

You own 75 shares of Company XYZ, and a 50% stock dividend has just been declared. You are entitled to receive 37.5 shares, but the company will only issue whole shares. You therefore receive 37 shares, plus a cash in lieu payment of $10.00 for the 1/2 share. Your adjusted cost basis for the initial 75 shares was $1000.00.

After the stock split, you own 75 plus 37.5 shares, for a total of 112.5 shares. Your adjusted cost basis per share is $1000.00 divided by 112.5 shares, or $8.89 per share.

The cost basis allocable to the fractional .5 shares is $8.89 x .5 = $4.44. The net gain to be reported on your Schedule D for the cash in lieu payment is therefore $10.00 less $4.44 or a net gain of only $5.56.

Instead of being taxed on $10.00, with a little effort on your part to allocate your cost basis to the fractional share, you will be taxed on only $5.56 of gain.

Disclaimer: Make sure that you verify such advice with your accountant :->)