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If I vested 100 options in StartupCo at a strike of $1 and I exercise then I will have paid $100 for those shares of StartupCo.

If BigCorp acquires StartupCo and I receive $5 and .25 shares in BigCorp (market value $10 on day of the transaction) per share in StartupCo then I'll receive $500 and 25 shares in BigCorp worth $250.

3 years down the road MegaCorp acquires BigCorp at $2/share and upon surrendering my certificate MegaCorp cuts me a check for $50.

I'm sad that I didn't sell shares in BigCorp at the time of the transaction but more importantly, what is my cost basis for the shares in BigCorp? And are they sold at a loss since BigCorp was at $10 on the day of the acquisition but now they're only worth $2?

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    For each acquisition, there's a notice advising how to allocate cost basis from the company being acquired. Is this question theoretical or does it outline a chain of events similar to something you went through? – JoeTaxpayer♦ Apr 17 '18 at 10:06
  • @JoeTaxpayer This is not theoretical but is the actual process I've gone through. The company names were obviously changed but I also made the numbers simpler. The acquisition of BigCorp by MegaCorp was on the open market. Since posting I've read about Cash to Boot and I realize that gain reported on the BigCorp acquisition is the lesser of Cash received or total gain. With the numbers changed the situation still reflects the actual scenario. – cclark Apr 17 '18 at 18:20
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If I vested 100 options in StartupCo at a strike of $1 and I exercise then I will have paid $100 for those shares of StartupCo.

100 shares / Cost basis $100

If BigCorp acquires StartupCo and I receive $5 and .25 shares in BigCorp (market value $10 on day of the transaction) per share in StartupCo then I'll receive $500 and 25 shares in BigCorp worth $250.

The notice would spell out the tax consequence of this transaction. But, as I read this, 2/3 of the value at that moment is replaced with cash, 1/3 with stock. $66.67 of your investment returned $500, and tax is due on that difference. (Thank-you, Dave, for comment.) You now own 25 shares of BigCorp, with a basis of $33.33 (1/3 the original basis)

3 years down the road MegaCorp acquires BigCorp at $2/share and upon surrendering my certificate MegaCorp cuts me a check for $50.

The long term gain is $16.67

I'm sad that I didn't sell shares in BigCorp at the time of the transaction but more importantly, what is my cost basis for the shares in BigCorp? And are they sold at a loss since BigCorp was at $10 on the day of the acquisition but now they're only worth $2?

See the math above. And a warning. All takeovers come with a notice of how to allocate basis. It's easy if there's a takeover of 100% cash, it's just a sale. The cash/stock mix is rarely as clean as my answer suggests. That notice would tell you the exact percents. The funny thing about the market? I can always wish I bought lower, sold higher. If I bought at the very low, and sold at very high, I'd just wish I bought more. It's possible to invest and grow rich over time, but never be happy with the short term results.

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  • At startup-to-bigcorp you also had a realized/taxable gain of $500-$66.67. Also, if you missed the notice at the time, IME they remain available from the successor company's website for many many years. Don't ask why I know this :} – dave_thompson_085 May 2 '18 at 17:41
  • Yes Dave. I should have added that line into my answer. Will do it when I’m not driving. 😳 – JoeTaxpayer♦ May 2 '18 at 17:51

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