Determining cost basis in a SPAC unit split into stock and warrants

Question

I bought 400 shares of IPOB.U at $11.84/unit. Each unit can be split into 1 share + 1/3 warrant when the holder desires (after the stock and warrants start trading freely, but not before.)

I called my broker a few months later to split the units into stock (IPOB) and warrants (IPOB.WS) and I ended up with 400 shares and 133 warrants. However the broker (e-Trade) set the cost basis for these new shares post reorganization to $0, and left it up to me to calculate the appropriate basis.

Here are my questions:

1. Since both the stock and warrant were trading freely on the day I purchased the units, I assume that my basis is whatever they were at closing — $10.85 and $2.84, respectively. Is this correct?
2. Does my clock for long-term cap gains start on the day I purchased the units (August) or when I split them (October)?
3. What would one do in the case where the stock and warrants aren't trading freely? How would one calculate the original basis of these post-split instruments?

Answer 1

In my opinion following is applicable in your case.

1. The acquisition price you received on original share must be spread evenly on new securities. This means the new share should get a cost basis $8.88 and the warrant should get cost basis of $2.96. My justification will be that when you got the original share split into 2, that transaction didn’t result in any gain and your investment price didn’t change too. Hence, the original cost basis should also be retained.

2. When you trade either the new share or the new warrant, capital gain calculation must have the start date as of the original acquisition date. Again, the investment you made has not returned any gain since the acquisition of original share.

3. Some investment firms or the company release fair market values for a big corporate action. Most US companies doesn’t have complicated FMV drivers. Some countries request share holder to apply average price of last 30 days for gain calculation.