A reverse stock split is when a company reduces the number of its outstanding shares, but without changing the total value of the shares. For example, if a company enacts a 2-for-3 reverse stock split, then the shareholders would end up with two shares for every three that they had owned prior to the split. At the same time, the price per share increases by the same ratio, so the value to the shareholders stay the same. However, the math doesn't work out evenly, and shareholders can end up with fractional shares. Companies often give cash in lieu (CIL) of fractional shares. Account for this as if you had sold shares on the open market.
Calculate the Cost Basis
Add up the total cost basis for your holdings prior to the reverse stock split. This includes the share cost of each purchase plus any fees or commissions related to those trades. It also includes the fair market value of any reinvested dividends. It does not include the cost of any shares you sold prior to the split. So if you bought 100 shares at $15 each, plus $10 in commissions, your total cost basis is $1,510.
Divide the total cost basis by the total number of shares you received in the reverse split, including fractions. This is your cost basis per share. If the 100 shares underwent a 1:3 reverse split, you would have 33.333 new shares. Divide the total cost basis of $1,510 by 33.333 to get a per share basis of $45.30.
Multiply the per share cost basis by the fractional portion to find the cost basis for the fractional shares. This should be smaller than the cost basis per share. In the example from the previous step, 0.333 fractional shares multiplied by $45.30 is $15.08.
Calculating and Reporting Gain or Loss
Subtract the cost basis of the fractional shares from the value of the cash you received. If the result is positive, you have a capital gain. If it is negative, you have a loss. If you had CIL of $25.00 for your 0.333 shares at a cost basis of $15.08, your total gain is $9.92.
Determine whether the gain is short or long term. If you held the shares for more than one year prior to the split, you have a long-term gain. If you held them for one year or less, then you have a short-term gain.
Consolidate your capital gain or loss with other similar gains and losses at tax time. Add your gain or loss as a line item on IRS Schedule D -- short-term gains and losses go in the top section of the form, while long-term gains and losses go on the bottom.
Your brokerage firm may calculate your gain or loss for you on your annual statement and tax forms.