Rules for determining your basis and holding period for stock received in stock dividends and splits.
This page explains how to determine your basis when you receive stock as a result of a non-taxable stock dividend or a stock split. The explanation covers your initial basis in the new shares you receive, and your adjustment in basis to the shares you already owned. This discussion does not cover the following:
- Stock you received from dividend reinvestment. Dividend reinvestment is not the same as stock dividends. See Stock Acquired Through a Dividend Reinvestment Plan.
- Stock you received in a taxable stock dividend. This is a relatively rare event. If the company or your broker notifies you that you received a taxable stock dividend, you should rely on information from the company or from a tax professional to determine your basis.
Companies sometimes increase the number of shares outstanding (and at the same time reduce the value of each share) by issuing stock dividends or stock splits. These events are usually non-taxable, but change the number of shares you own and the basis of those shares.
A stock dividend is generally declared in terms of a percentage. For example, in a 5% stock dividend, you will receive one additional share for every 20 shares you already own. A stock split is usually declared as a fraction. In a 2-for-1 split, you receive one additional share for every share you own (so that you end up owning two shares for every one you owned before the split). Stock splits can occur at odd fractions. For example, if your stock splits 3-for-2, you receive one additional share for every two you owned before the split (and end up owning three for every two you had before). A 3-for-2 stock split is the same as a 50% stock dividend.
Determining your basis
When you receive additional shares as a result of a non-taxable stock dividend or split, your total basis in your stock remains the same. The basis is divided among the shares you already owned and the new shares in proportion to the value of the shares. In the usual case, where the new shares are exactly the same as the old ones, the value is the same, and basis is allocated equally to each share.
Example: You own 400 shares of XYZ with a basis of $33 per share (total basis of $13,200). XYZ declares a 10% stock dividend. You receive 40 additional shares and now own a total of 440 shares. Your total basis is unchanged, so your basis per share is now $13,200 divided by 440, or $30.
Example: You own 150 shares of ABC with a basis of $24 per share, and another 100 shares of ABC with a basis of $28 per share. The stock splits 2-for-1. After the split, you own 300 shares with a basis of $12 per share, and 200 shares with a basis of $14 per share. (This is true even if you receive a single certificate representing your 250 new shares.)
You are treated as if you held the new shares as long as you held the old shares. For example, if you bought 400 XYZ on June 10, 2000 and received 40 new shares in a non-taxable stock dividend on November 10, 2004, any gain or loss on a sale of the 40 new shares will be treated as a long-term capital gain even if you sold them immediately after you acquired them.