Stock dividends occur when a corporation of distributes additional stock to existing shareholders in proportion to how much stock they already own. No tax reporting is required when a stock dividend is received as long as distributions are common stock only to every recipient, not cash or preferred stock. Accounting for future gain or loss from selling shares received as a stock dividend requires knowing the cost basis for the shares after the stock dividends. The basis of non-taxable stock dividends is determined by allocating part of your cost in originally owned shares to the new number of shares that you own after the stock dividend is distributed.
If you inherited the original stock shares, your basis is normally the value on the date of death for the person who bequeathed it. The basis of taxable stock dividends is the fair market value of the shares on the date received. Stock dividends are taxable if you or any other shareholder received cash or preferred stock while others received common stock.
Assessing Your Total Shares
Add your originally owned number of shares and the number of shares received as non-taxable stock dividend. This is the total number of shares held after the stock dividend. For example, if you owned 500 shares, and the company gave out one share for each existing five shares as a stock dividend, you would now have 500 + 500 / 5 = 600 shares. It is essential that you do not leave your non-taxable stock dividends out of this equation, as they play a significant role in calculating your new cost basis.
Calculate Your New Cost Basis
Divide your cost of the original shares owned by the total number of shares held after the stock dividend. This is your accounting of the new basis per share. For example, if those initial 500 shares cost you $6 each, the total cost of the original shares would be 500 x $6 = $3,000. Now that you own 600 shares, your cost basis is $3,000 / 600 = $5 per share.
Multiply the new basis per share by the number of shares when reporting a sale of any stock, regardless of selling originally held shares or stock dividends. This results in accounting for the basis of both stock dividends and original shares. For example, if you now sell 10o of your shares after the stock dividend, their total cost basis will be $5 * 100 = $500. These calculation methods can be used in virtually all similar scenarios, irrespective of how many shares you have in your possession at any given time.
- If you inherited the original stock shares, your basis is normally the value on the date of death for the person who bequeathed it.
- The basis of taxable stock dividends is the fair market value of the shares on the date received. Stock dividends are taxable if you or any other shareholder received cash or preferred stock while others received common stock.
Brian Huber has been a writer since 1981, primarily composing literature for businesses that convey information to customers, shareholders and lenders. Huber has written about various financial, accounting and tax matters and his published articles have appeared on various websites. He has a Bachelor of Arts in economics from the University of Texas at Austin.