Capital Gains, Losses, Sale of Home:
Stocks (Options, Splits, Traders)
This is archived information that pertains only to the 2005 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
How do I figure the cost basis of stock that has split, giving me
more of the same stock, so I can figure my capital gain (or loss) on the sale
of the stock?
When the old stock and the new stock are identical the basis of the old
shares must be allocated to the old and new shares. Thus, you generally divide
the adjusted basis of the old stock by the number of shares of old and new
stock. The result is your new basis per share of stock. If the old shares
were purchased in separate lots for differing amounts of money, the adjusted
basis of the old stock must be allocated between the old and new stock on
a lot by lot basis.
How do I figure the cost basis when the stocks I'm selling were
purchased at various times and at different prices?
If you can identify which shares of stock you sold, your basis is what
you paid for the shares sold (plus sales commissions). If you sell a block
of the same kind of stock, you can report all the shares sold at the same
time as one sale, writing VARIOUS in the "date acquired"
column of Form 1040, Schedule D (PDF). However,
what you enter into the "cost or other basis" column is the total of all the
acquisition costs of the shares sold.
If you cannot adequately identify the shares you sold and you bought the
shares at various times for different prices, the basis of the stock sold
is the basis of the shares you acquired first (first-in first-out). Except
for certain mutual fund shares, you cannot use the average price per share
to figure gain or loss on the sale of stock.
For more information, refer to Publication 550, Investment Income
and Expenses.
How do we show on our tax form where dividends are reinvested?
Some corporations allow investors to choose to use their dividends to buy
more shares of stock in the corporation instead of receiving the dividends
in cash. If you are a member of this type of plan, you must report the fair
market value on the dividend payment date of the dividends that are reinvested
as income on your tax return. You do not actually show that the dividends
were reinvested on your return. Keep good records of the dollar amount of
the reinvested dividends, the number of additional shares purchased, and the
purchase dates. You will need this information when you sell the shares.
Report the dividends that were reinvested with your other dividends, if
any, on Form 1040 (PDF) or Form 1040A (PDF). If your total income from ordinary dividends exceeds a dollar
amount set by law, you also must file either Form 1040, Schedule B (PDF) or Form 1040A, Schedule 1 (PDF).
For more information on this and other types of dividend reinvestment plans,
refer to Ordinary Dividends in Chapter 1 of Publication 550, Investment
Income and Expenses.
How do I compute the basis for stock I sold, when I received the
stock over several years through a dividend reinvestment plan?
The basis of the stock you sold is the cost of the shares plus any adjustments,
such as sales commissions. If you have not kept detailed records of your dividend
reinvestments, you may be able to reconstruct those records with the help
of public records from sources such as the media, your broker, or the company
that issued the dividends.
If you cannot specifically identify which shares were sold, you must use
the first-in first-out rule. This means that you deem that you sold the oldest
shares first, then the next oldest, then the next-to-the-next oldest, until
you have accounted for the number of shares in the sale. In order to establish
the basis of these shares, you need to have kept adequate documentation of
all your purchases, including those that were through the dividend reinvestment
plan. You may not use an average cost basis. Only mutual fund shares may have
an average cost basis.
Refer to Publication 550, Investment Income and Expenses, and Publication 551, Basis of Assets.
How do I report participation in a qualified employee stock purchase
plan on my tax return?
If you participated in a qualified employee stock purchase plan, you do
not include any amount in your gross income as a result of the grant or exercise
of your option to purchase stock. When you sell the stock that you purchased
by exercising the option, you may have to report compensation and capital
gain or capital loss. For additional information on tax treatment and holding
period requirements, refer to Publication 525, Taxable and Nontaxable
Income.
I purchased stock from my employer under a qualified employee stock
purchase plan. Now I have received a Form 1099-B from selling it. How do I
report this?
If the special holding period requirements are met, generally treat gain
or loss from the sale of the stock as capital gain or loss. However, you
may have compensation income if:
- The option price of the stock was below the stock's fair market value
at the time the option was granted, or
- You did not meet the holding period requirement.
The holding period requirements is that you must hold the stock for more
than 2 years from the time the option is granted to you and for more than
1 year from when the stock was transferred to you. If you do not meet these
holding period requirements, there is a disqualifying disposition of the stock.
The compensation income that you should report in the year of the disqualifying
disposition is the excess of the fair market value of the stock on the date
the stock was transferred to you less the amount paid for the shares.
If the holding period requirements are met, but the option price is below
the fair market value of the stock at the time the option was granted, you
report the discount as compensation income (wages) when you sell the stock.
Generally, this compensation income is the lesser of the excess of the fair
market value of the stock on the date of the disposition less the exercise
price OR the excess of the fair market value of the stock at the time the
option was granted less the exercise price.
If the holding period requirement are met and your gain is more than the
amount you report as compensation income, the remainder is a capital gain
reported on Form 1040, Schedule D (PDF). If you
sell the stock for less than the amount you paid for it, your loss is a capital
loss, and you do not have ordinary income.
For more information, refer to Publication 525, Taxable
and Nontaxable Income, and Publication 551, Basis
of Assets.
Should I advise the IRS why amounts reported on Form 1099-B do not
agree with my Schedule D for proceeds from short sales of stock not closed
by the end of year?
If you are able to defer the reporting of gain or loss until the year the
short sale closes, there are certain notations you can make on your Form 1040, Schedule D (PDF) that will allow you to reconcile
your Forms 1099-B to your Schedule D and still not recognize the gain or loss
from the short sale. You will also need to attach a statement explaining the
details of your short sale and that it has not closed as of the end of the
year. Include your name as it appears on the return and your social security
number.
For more on these rules and exceptions that may apply, refer to Chapter
4 of Publication 550, Investment Income and Expenses.
Do I need to pay taxes on that portion of stock I gained as a result
of a split?
No, you generally do not need to pay tax on the additional shares of stock
you received due to the stock split. You will need to adjust your per share
cost of the stock. Your overall cost basis has not changed, but your per share
cost has changed.
You will have to pay taxes if you have gain when you sell the stock. Gain
is the amount of the proceeds from the sale, minus sales commissions, that
exceeds the adjusted basis of the stock sold.
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