Cost basis for stock spin-offs
Jan. 16th, 2013 11:12 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
livingdebOne problem with owning stocks (outside Roth vehicles) is dealing with tax issues.
Whenever you sell a stock, the IRS wants to tax your capital gains. Which means you have to know how much you paid for your stocks originally and how much you sold them for. That's got to be a giant headache if you're a day trader! It's also kind of a headache if you've owned your stock for longer than your broker has online records.
You also have to keep track of how long you owned your stocks because you get taxed at different rates depending on if you've held a stock for more or less than a year. (And it's not enough to know whether it's more or less than a year old--the IRS wants exact dates.)
So what happens when you own a stock that splits into two? Besides now costing twice as much if you want to sell it all (one fee for each new company)?
Sounds like another big headache, but it's not as bad as it could be.
First, you are considered to have bought both stocks at the same time you bought the original stock. So if you've owned the stock for a year, and you don't like one or both of the new stocks, they're both considered old, so you can sell them right away and still get the better tax treatment.
And what about the original price, aka "cost basis"? Even if it's a 1:1 split (you now have the same number of shares of each) it's not as easy as cutting your original cost in half. Someone has to actually calculate the relative values on the day of the split. The IRS is not clear on how to do this, so I'm sure rich people can hire fancy accountants to try all the reasonable calculations and pick the one that works out the best for them. But the company that split into two also generally does one of the appropriate calculations and publishes it on their website under investor relations. So, for example, if one of the new companies is considered to be worth 47% of the total, you multiply your original cost by .47 to get your new cost basis.
I like to leave this whole equation in my spreadsheet so I can tell that I've already done this and so I can still see the original cost if I want. I also leave myself a note as to where I found that percentage.
Whenever you sell a stock, the IRS wants to tax your capital gains. Which means you have to know how much you paid for your stocks originally and how much you sold them for. That's got to be a giant headache if you're a day trader! It's also kind of a headache if you've owned your stock for longer than your broker has online records.
You also have to keep track of how long you owned your stocks because you get taxed at different rates depending on if you've held a stock for more or less than a year. (And it's not enough to know whether it's more or less than a year old--the IRS wants exact dates.)
So what happens when you own a stock that splits into two? Besides now costing twice as much if you want to sell it all (one fee for each new company)?
Sounds like another big headache, but it's not as bad as it could be.
First, you are considered to have bought both stocks at the same time you bought the original stock. So if you've owned the stock for a year, and you don't like one or both of the new stocks, they're both considered old, so you can sell them right away and still get the better tax treatment.
And what about the original price, aka "cost basis"? Even if it's a 1:1 split (you now have the same number of shares of each) it's not as easy as cutting your original cost in half. Someone has to actually calculate the relative values on the day of the split. The IRS is not clear on how to do this, so I'm sure rich people can hire fancy accountants to try all the reasonable calculations and pick the one that works out the best for them. But the company that split into two also generally does one of the appropriate calculations and publishes it on their website under investor relations. So, for example, if one of the new companies is considered to be worth 47% of the total, you multiply your original cost by .47 to get your new cost basis.
I like to leave this whole equation in my spreadsheet so I can tell that I've already done this and so I can still see the original cost if I want. I also leave myself a note as to where I found that percentage.
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no subject
on 2013-01-16 05:17 pm (UTC)no subject
on 2013-01-16 06:54 pm (UTC)On the other hand, this is my second spin-off I've lived through, and I did not figure out the cost basis stuff last time. Slowly learning more, one day at a time.
I am not interested in getting money for investment advice (what if the stock market plummets right after I talk someone into it?).
For people with no time (or interest), I recommend just getting a Target fund. It's part stocks (riskier, but probably has better returns) and part bonds (safer, with probably lower returns). They do the rebalancing (when something bubbles, they sell some of that to buy stuff that costs less). And they change the balance to have more and more bonds as you get closer to retirement age. So it's all taken care of for you by someone who probably has very little room for scumminess.
If you don't have access to those, look for index funds--they are cheaper than other funds, have more diversity, and tend to do better, but never excitingly better.
If you have way too many choices at work, concentrate on getting funds with the lowest fees and highest diversity.
Also, know that if you get into stocks, you are likely to lose 1/3 or 1/2 of your money every decade or two, which is depressing and scary. Usually the gigantic plummets undo themselves within a couple of years, but after the Great Depression it took a couple of decades. So if you would probably freak out and sell after that, it's better to not buy in the first place (or don't buy more than you would mind losing, which is how I started).
As for low-interest savings, how low is low? It's not too hard to get 0.8% these days.
Meanwhile, ask me many any questions you like. Fun!
Note: I only require more than $15/hour when I'm being hired as a world expert. I am not an expert in investments.
no subject
on 2013-01-16 08:13 pm (UTC)no subject
on 2013-01-16 10:24 pm (UTC)