Regardless of the type of split, it will affect the basis price at which you bought the stock. Failure to take this issue into account when computing capital gains and losses can result in substantial under reporting of income on your 1040 to the Internal Revenue Service (IRS). Follow these steps to compute the correct calculations.
Find out the original basis of your stock purchase. If you still have the original confirmation statement, it will be on there. You will need both the date and the purchase price minus any commission paid. This dollar amount is your cost basis for the stock.
Next, find the terms of any and all stock splits that has been declared since your purchase. The company website will probably have that information in the investor section. If not, it will probably have contact information for the transfer agent who administrates the stock transactions.
Get a calculator and start doing the math. If you bought the stock five years ago and it split twice, then the number of shares you have will have increased proportionately. The basis for the stock will also decrease proportionately. For example, if you bought 100 shares at $50 and the stock split two for one, then you now have 200 shares with a basis of $25 per share. If the stock had split four for one, then your new basis would be $12.50 per share.
Use the dollar amounts of the purchase and sale against each other, taking dividends into account, if you have not bought or sold any shares since your original purchase and you sold all of your post-split shares at once.
You must use the post-split basis if you only sell part of your basis. If you bought 100 shares of stock at $50 per share and it splits four for one, then you own 400 shares with a basis of $12.50 per share. If you sell 100 shares at $25 per share, then your basis will be $1250 plus commission, and your sale price will be $2500 minus commission.
Mark Cussen has more than 17 years of experience in the financial industry. He received his B.S. in English from the University of Kansas and became a Certified Financial Planner in 2001. He has published financial educational articles on such websites as Investopedia and Money Crashers. He also provides financial education and counseling for members of the U.S. military and their families.