Stock Spin-Offs / Mergers

Occasionally a company will spin-off shares in another company to all of its shareholders.  Basically the entire transaction is a zero sum event, where the total cost basis of all the shares owned after the spin-off equals your total cost basis in the shares owned before the spin-off.

So if your cost basis for 100 shares of stock XYZ is $10 per share going into the spin-off, your total cost basis for these 100 shares is $1,000.

If XYZ spins off 1 share of ABC for every 10 shares that you own of XYZ, then your total cost basis for all of these shares, 100 shares of  XYZ plus 10 shares of ABC still equals $1,000.

If the price of the 10 shares of ABC you received from the stock spin-off is $4 per share, then your total cost basis for these 10 shares is $40.  This amount must be then subtracted from your total cost basis of your original 100 shares of XYZ.  These are now worth only $960.  Therefore your price per share for XYZ is now $960 divided by 100 shares or $9.60 per share.

This can get really complex, especially when you own many shares purchased at many different prices and you need to figure out your new cost basis in the shares that you are left with after the spin-off, or if the company spins off shares in several different companies.

Stock Mergers

Occasionally a company will purchase shares of another company and merge the two companies into one, sort of like a reverse spin-off.  So if you owned shares in the company that was bought, those shares no longer exist and you now own shares in the parent company instead.  As shown above, your total cost basis for these new shares does not change, only the quantity and price of those shares will change.

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^{Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Armen Computing Ltd. makes no investment recommendations and does not provide financial, tax or legal advice. Please consult your tax advisor or accountant to discuss your specific situation. You are solely responsible for your investment and tax reporting decisions, and you should carefully evaluate all information delivered to you by Armen Computing Ltd. and TradeLog. Not all information may be appropriate for all investors.}

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