Companies split their stock for several reasons; the primary reason for stock splits is to control the price in the market. Investors are responsible for maintaining cost basis information for federal income tax purposes. Investors can choose to maintain cost basis on an average-per-share basis or a specific share basis. Stock splits affect the cost basis per share of stock. Cost basis recalculations after a split are quite straight forward.
Determine the total cost basis before the stock split. Cost basis will generally be what you paid for the stock. Other rules apply if you received the stock as a gift or inheritance. Stock dividends received change the number of shares you have. Receiving stock dividends does not change the total cost basis.
Determine the number of shares after the stock split. If you had 100 shares before a two for one split, then you now have 200 shares. If you had 100 shares before a three for one split, then you now have 300 shares.
Use a calculator to divide the total cost basis before the stock split by the number of shares you have after the stock split. For example, you had 100 shares with a total cost basis of $2,400.00 before a three for one split. Divide $2,400.00 (basis) by 300 shares (number of shares after split). The result is you new cost basis per share, in this example $8.00 per share.
Calculate basis for any shares you sell after the split. If you sell 200 of the shares in the example, the basis of the shares sold is $8.00 times 200 shares sold equals $1,600.00. The basis of the unsold shares is $8.00 times 100 shares remaining equals $800.00.
Update cost basis after any stock splits or stock dividends. It is much easier to do several simple calculations to maintain basis information than it is to try to rebuild basis information after many transactions.
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