Stock splits generally aren’t taxable until the shares are sold. The IRS provides a basis calculation you’ll need to use to determine your capital gains.
If one of the companies you own shares in decides to issue a stock split, giving you additional stock for each share you own, you generally don’t pay capital gains on the new shares. It is when you sell those shares for more than your tax basis that you’ll have to calculate capital gains on your taxes. To calculate these gains, you first need to figure out your tax basis in the old and new shares.
Basis in Stock Before Split
Your tax basis, or overall cost, in the shares of stock you trade is generally equal to the market price you paid for them plus any commissions a broker charged to execute the trade. When you sell stocks, your capital gain is the profit you earn on the trade, calculated as the sales proceeds minus your tax basis. For example, suppose you first purchased 100 shares of Starbucks Corporation at $40, or $4,000 in total, and then an additional 50 shares at $44, or $2,200. In this scenario, your tax basis in the 150 shares is $6,200. Therefore, selling the stock for $8,000 would give you a capital gain of $1,800.
How to Calculate Basis After Stock Split
Suppose you hold the stock and are a shareholder of record on March 30, 2015, when Starbucks issued a 2-for-1 stock split. This means that for each share you own, the company gives you an additional one, thereby increasing your Starbucks holdings to 300 shares. Since you bought the stock on two different dates, the Internal Revenue Service requires that you calculate your tax basis in each lot separately.
To figure out the tax basis for the first 100 shares, divide your total tax basis before the split by the number of shares you hold after the split ($4,000/200). This reduces your per-share basis to $20, but your total basis of $4,000 doesn’t change. Performing the same calculation for the second lot of 50 shares reduces the basis of each share from $44 to $22.
Capital Gains When You Sell Shares
When you eventually sell some or all of your investment in Starbucks, you’ll need to determine which shares you sold. As a guideline, the IRS requires a first-in-first-out approach, meaning you always use the tax basis of the older shares first. To illustrate how this works, assume you sell only 80 shares at the new market price of $55 ($4,400 total). Since you’re deemed to have sold 80 of the 200 shares from the initial lot, you’ll use $20 as your tax basis in each share. This gives you a capital gain of $35 per share, or $2,800 in total.
Calculating and Reporting Capital Gains
All of your stock sales, including the sale of any shares you receive from a stock split, must be reported on Form 8949 and Schedule D when preparing your tax return. The rate of tax you’ll owe on the gain depends on how long you owned the underlying stock. If you held it for more than one year, your profit is a long-term capital gain that’s taxed between zero and 20 percent, depending on the tax bracket you’re in. Otherwise, the gain is taxed at the same rate as the other income reported on your return.