Frequently Asked Tax Questions
Capital Gains, Losses, Sale of Home - Stocks (Options, Splits,
Traders)
Rev. date: 12/21/2012
A stock split occurs when a company creates additional shares, thus reducing the price per share. If you own stock that has split and now own additional shares, you must adjust your basis per share or per the lots of the stock you
own.
If the old shares of stock and the new shares are uniform and
identical:
- The basis of the old shares must be allocated to the old and new
shares.
- The per share basis is determined by dividing the adjusted basis of the old stock by the number of shares of old and new
stock.
If the old shares were purchased in separate lots for differing amounts of money (a different basis per
lot):
- The adjusted basis of the old stock must be allocated between the old and new stock on a lot by lot
basis.
Rev. date: 12/21/2012
The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees. If you acquired these securities other than by purchase, your basis is usually determined by fair market value or the previous owner’s adjusted basis. When selling securities, you should be able to identify the specific shares to be
sold.
If you
can
identify which shares of stock you sold, your basis is:
- What you paid for the shares sold plus any costs of purchase.
- The total of all the acquisition costs of all the shares sold if you sell a block of the same kind of stock and you report all the shares sold at the same time as one
sale.
If you
cannot adequately identify
the shares you sold and you bought the shares at various times for different
prices, the basis of the stock sold is:
- The basis of the shares you acquired first (first-in first-out). Except for certain mutual fund shares, you cannot use the average price per share to figure gain or loss on the sale of
stock.
You are required to keep and maintain records that identify basis of all capital assets. If you do not have adequate records to document the basis, the IRS requires you to treat your basis as
zero.
Rev. date: 12/21/2012
Dividends that are reinvested on your behalf purchase additional shares or fractions of shares for
you.
- If the reinvested dividends buy shares at a price equal to their fair market value, you must report the dividends as income along with any other ordinary
dividends.
- If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment
date.
- Report your reinvested dividends with your other dividends, if any, on
Form 1040 (PDF) or
Form 1040A (PDF).
- You must complete
Schedule B (Form 1040A or 1040)
(PDF) and attach it to your Form 1040 or Form 1040A, if your ordinary dividends
(Form 1099-DIV (PDF), box 1a) and your reinvested dividends are more than
$1,500.
Note:
Keep records of the amount of the reinvested dividends, the number of
additional shares purchased, and the purchase dates. You will need this
information to establish your basis when you sell the shares.
Rev. date: 12/21/2012
An investor must include in income the amount received as a dividend. The dividend reinvestment plan then uses the amount received as a dividend to purchase additional shares or fractional shares of the same stock, usually at the fair market value of the stock on the day reinvested. The basis of stock that you received through a dividend reinvestment
plan:
- Is the cost of the shares plus any adjustments, such as sales
commissions.
- If you have not kept detailed records of your dividend reinvestments, you must reconstruct those records with the help of public records from sources such as the media, your broker, or the company that issued the
dividends.
- The basis must be determined by using the first-in first-out rule if you cannot specifically identify which shares were
sold.
- If certain conditions are met, you can use the average basis method to determine the basis of shares acquired in connection with a dividend reinvestment plan after December 31, 2010. You cannot use the average basis method for shares acquired in connection with a dividend reinvestment plan before 2011.
The first-in first-out rule means:
- You use the basis of the shares you acquired first as the basis of the shares sold. In other words, the oldest shares you own are considered sold
first.
- You need to have kept adequate documentation of all your purchases, including those that were made through the dividend reinvestment plan in order to establish the basis of these
shares.
Rev. date: 12/21/2012
A § 423 employee stock purchase plan is a type of statutory stock option plan. If you participated in an employee stock purchase
plan:
- You do not include any amount in your gross income as a result of the grant or exercise of your option to purchase
stock.
- You may have to report compensation (Form 1040 (PDF), Line 7) and capital gain or loss (Schedule D (Form 1040) (PDF),
Capital Gains and Losses, and
Form 8949 (PDF),
Sales and Other Dispositions of Capital Assets) when you sell the stock.
- The amount of compensation and capital gain or loss depends on whether you satisfy the holding period
requirement.
The holding period requirement is satisfied if:
- You do not sell the stock within 1 year after the option is
exercised.
- You do not sell the stock within 2 years after the option is
granted.
You should receive a
Form 3922 (PDF),
Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section
423(c), from your employer when the employer has recorded the first transfer of legal title of stock you acquired pursuant to your exercise of the option. This form will assist you with the tracking of your holding period and your cost basis for the stock purchased through your qualifying
plan.
Rev. date: 12/21/2012
A § 423 employee stock option plan. You have taxable income or a deductible loss when you sell the stock. Your income or loss is the difference between the amount you paid for the stock (the option price) and the amount you receive when you sell it. You generally treat this amount as capital gains or losses; however, you may also have ordinary income to
report.
You must account for and report this sale on your taxes. You have indicated that you have a
Form 1099-B (PDF); you must report all 1099-B transactions on
Schedule D (Form 1040) (PDF),
Capital Gains and Losses, and
Form 8949 (PDF),
Sales and Other Dispositions of Capital Assets. This is true even if there is no net capital gain to be taxed.
You must first determine if you meet the holding period. The holding period requirement is satisfied if you do not sell the stock until the end of the later
of:
- The 1-year period after the stock was transferred to you, or
- The 2-year period after the option was granted.
If the holding period requirement is satisfied:
- The sale of stock is treated generally as giving rise to capital gain or loss. You may have ordinary income if the option price was below the stock's fair market value at the time the option was granted;
or
If the holding period requirement is not satisfied:
- The ordinary income that you should report in the year of the sale is the amount by which the fair market value of the stock at the time of purchase (or vesting, if later) exceeds the exercise price. Any additional gain or loss is treated as capital gain or
loss.
If the holding period requirement is satisfied but the option exercise price is below the fair market value of the stock at the time the option was
granted:
- On
Form 1040
(PDF), Line 7, you report as ordinary income (wages) the lesser of (1) the
amount by which the stock’s fair market value on the date of grant exceeds
the option price or (2) the amount by which the stock’s fair market value
on the date of sale exceeds the option price.
- If your gain is more than the amount you report as ordinary income, the remainder is a capital gain reported on Schedule D (Form 1040) and Form
8949.
If you do not satisfy the holding period requirement and sell the stock for less than the amount you paid for it, your loss is a capital loss, but you still may have ordinary
income.
You should receive a
Form 3922 (PDF),
Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section
423(c), from your employer when the employer has recorded the first transfer of legal title of stock you acquired pursuant to your exercise of the option . This form will assist you with the tracking of your holding period and your cost basis for the stock purchased through your qualifying
plan.
Rev. date: 12/21/2012
For most taxpayers,
Form 1099-B (PDF) should match
Form 8949 (PDF),
Sales and Other Dispositions of Capital Assets. You must declare any difference on your return.
If you entered into a short sale on or after January 1, 2011, you will receive a 1099-B for the year in which the short sale closed. Both proceeds and basis information related to the short sale will be reported at the same time, so amounts reported on Form 1099-B should agree with the amounts you report on your Form
8949.
If you entered into a short sale before January 1, 2011, you should have received a Form 1099-B for the year the short sale was opened reporting gross proceeds from the short sale. When the short sale is closed in a later year, use the information from the pre-2011 Form 1099-B to determine the amount of gross proceeds from the short sale when completing your Form 8949 for the year the short sale is closed. For a short sale entered into before January 1, 2011, your broker is permitted, but not required, to send you a Form 1099-B for the year the short sale is closed to provide you with information about the short sale.
There may be other times when your broker reports a basis that is inconsistent with your records. The instructions for Form 8949 advise you on how to make this basis adjustment to report your taxes correctly. For more specific rules, refer to
Publication 550,
Investment Income and Expenses and the instructions to the Form 8949 found in the
Instructions for Schedule D (and Form 8949) (PDF),
Capital Gains and Losses.
Rev. date: 12/21/2012
No. In a stock split, a corporation issues additional shares to current shareholders, but your total basis does not change. Following a stock split, you must reallocate your basis between the original shares and the shares newly acquired in the stock
split.
- Stock splits do not create a taxable event; you merely receive more stock evidencing the same ownership interest in the corporation that issued the stock. You do not report income until you sell the
stock.
- Your overall basis is not changed as a result of a stock split, but your per share basis is changed. You will need to adjust your basis per share of the
stock.
- For example, you own 100 shares of a corporation with a $15 per share basis, for a total basis of $1,500. In a 2-for-1 stock split, every shareholder is issued an additional share of stock for each share the shareholder owns. You now own 200 shares, but your total basis is still $1,500. Following the stock spit, you must reallocate your basis between the original shares and the shares newly acquired in the stock split. Your basis per share is now $7.50 ($1,500 divided by 200) for each of the 200
shares.
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