How to Report Capital Gains on Stock Splits on Your Income Taxes
Companies issue stock splits for a number of reasons. When the share price of a stock rises too high, the company may issue a 2-for-1 or 3-for-1 stock split to reduce the share price to more affordable levels. If the stock price falls, the company may issue a reverse stock split to boost the price, even though that means you suddenly own fewer shares. But no matter what the reason, it is important to adjust the cost basis of your stock to account for those stock splits. If you fail to do so, you could inadvertently overpay or underpay your capital gains taxes.
- 1 -Find out what type of stock split that occurred. In a normal stock split, the number of shares you own increases, while the value of each share goes down. For example, if you owned 100 shares of a stock with a share price of $60, you will own 200 shares of the stock at $30 a share following a 2-for-1 stock split. In a reverse stock split the opposite happens — if you owned 500 shares of stock selling for $5 a share, you would own 100 shares of stock at $25 a share following a 5-for-1 reverse split.
- 2 -Find the original purchase confirmation you received when you originally bought the stock. Note the date and nature of the stock split by writing it on that confirmation. Also, record the stock split and the new number of shares you own in the spreadsheet you use to track your investments.
- 3 -Complete Schedule D when you sell the stock and file your taxes. You do not owe capital gain taxes on the stock until you actually sell it. When you sell a stock, you should receive a 1099-B form early the following year. This form shows the net proceeds of the stock sale, and it is up to you to compute and report the profit you made when you sold the stock.
- 4 -Subtract the total purchase price of the stock you sold from the proceeds of the sale. This is the amount of your gain, which you must report on Schedule D when you file your taxes.