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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?

  • Note no one ever does splits for such a silly ratio, and rarely even stock dividends for something like .071. But a different company acquiring yours for stock does often end up with difficult numbers like this. (Or for stock plus cash, which causes even more tax headache.) Since 2012 US brokers are required to compute this for you and put it on your 1099-B; unless you enjoy making your life difficult I would just use their numbers. If you don't want to wait until next year they may have the info on their website within a few days of the transaction; mine does. – dave_thompson_085 Apr 26 at 5:20
  • @dave_thompson_085 looks like a real case: marketscreener.com/SUNCORP-GROUP-LTD-6491453/news/… :) – Pascal Belloncle Apr 26 at 6:23
  • Yup, you caught me. It's SUN.ASX. I fudged the numbers and dates; I should've also fudged the ratio :) – Laith Apr 26 at 16:47
  • @dave_thompson_085 , This is a real example and I bring it up here because my broker has a strange cost basis calculation that i can't seem to mathematically reach. – Laith Apr 26 at 16:51
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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.

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  • The fractional shares sold as the result of the split are no different than if you had sold those shares on the same date. No, it doesn't work that way (see my answer). – Bob Baerker Apr 25 at 23:43
  • @BobBaerker from the same link I provided, it says "you must adjust your basis per share or per the lots of the stock you own" so if you are doing lot by lot, this still applies, unless I'm missing something, I'm not an accountant :) What you are suggesting in one possible approach – Pascal Belloncle Apr 26 at 3:14
  • sorry, the quote from my comment above is actually from a different page irs.gov/faqs/capital-gains-losses-and-sale-of-home/… although you end up with fractional lots in this case. Clearly you can't instruct your broker to sell a lot with fractional shares, even though there are now brokers that will let you do this, but most don't. – Pascal Belloncle Apr 26 at 8:44
  • unless the broker doesn't sell just .11, but all the fractional shares from each lot, then you'd end up with non fractional lots, and easy to figure out which bit is long term, and which is short term (to answer an other comment from @Laith – Pascal Belloncle Apr 26 at 8:55
  • In IRS Publication 550, find the section titled Distributions of Stock and Stock Rights. Then go to the sub section titled Fractional Splits. It spells out how to determine the cost basis of the shares being sold. – Bob Baerker Apr 26 at 11:08
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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 :->)

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  • In this case, how do you determine if it's Long Term gain or loss? Some were bought in 2017 and some were 2019 (6 months ago), which date is used? And what happens to this mix of dates going forward? – Laith Apr 26 at 1:42
  • You would use FIFO. As I mentioned to Patrick below, see IRS Publication 550. Find the section titled Distributions of Stock and Stock Rights. Then go to the sub section titled Fractional Splits. It spells out how to determine the cost basis of the shares being sold. With multiple purchases, shares from the first purchase would be used (FIFO). – Bob Baerker Apr 26 at 11:10

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