Tax rules for cash received in mergers depend on the reason you received cash.

When one company merges into another, its shareholders may receive cash, stock, or a combination of the two. Cash received in mergers may be taxed in different ways.

## Taxable merger

If most or all of the merger consideration is cash, the acquisition will be classified as a taxable merger. Shareholders of the acquired company report a sale of their shares for an amount equal to the cash received plus the value of other consideration (typically stock of the acquiring company), if any.

## Mostly stock

When most or all of the merger consideration is stock of the acquiring company, the transaction may not be fully taxable. The company should provide tax information on its website or in a message to shareholders. You may see the merger described as “tax-free,” but this doesn’t mean it will be entirely tax-free to shareholders who receive cash or other consideration in addition to stock in the acquiring company. The following discussion assumes you received cash in addition to stock in one of these mergers.

## Cash in lieu of fractional shares

One reason for receiving cash is to deal with a situation where the number of new shares you’re supposed to receive isn’t a whole number. In this case, you’ll probably receive cash in lieu of (instead of) the fractional share. You’re treated as if you received the fractional share and then sold it for the amount of cash you received. You have to allocate a portion of your basis to the fractional share.

Example: Suppose the formula used for the merger would have given you 144.25 shares. You ended up with 144 shares plus cash for .25 shares. Divide the total basis of your old shares by 144.25 to get the basis per share of the new shares. Your basis for the fractional share you “sold” is .25 times the basis per share.

## Cash consideration

A merger may be only partly taxable if shareholders receive a combination of stock and cash. Here is the procedure if you received cash (other than in lieu of a fractional share), but it wasn’t enough to make the transaction fully taxable.

Gain or loss. You need to determine the amount of gain or loss you have in the transaction.

• Find out the total consideration per share in the merger. Generally the company tells you this at the time of the merger. If not, you should be able to find it on the company’s website. For example, for each share of your company you might receive \$9.00 in cash plus \$98.50 worth of stock, for total consideration of \$107.50 per share.
• Multiply by the number of shares you owned to get the total amount of consideration you received.
• Subtract your basis in the shares you owned to find the amount of gain or loss.

If you have a gain. When the result is a gain, you don’t necessarily report the full amount on your tax return. The amount of gain you report is the overall gain determined above or the amount of cash you received, whichever is smaller. Your basis in the shares you received is equal to your basis in the old shares, increased by the amount of gain you reported and decreased by the amount of cash you received.

If you have a loss. You can’t report a loss on this transaction. However, you get to receive the cash portion of the consideration without reporting gain or income. Your basis in the shares you received is the same as your basis in the shares you surrendered, reduced by the amount of cash you received.

## Example

Let’s see how this plays out with some actual numbers.

Example: You owned 100 shares of Yourco. Bigco acquired Yourco, providing the Yourco shareholders with .5 shares of Bigco plus \$9.00 in cash for each share they owned. Based on the value of Bigco stock, total consideration received by Yourco shareholders was \$107.50 per share.

Your total consideration was \$107.50 per share times 100. That comes to \$10,750. You received \$900 of that amount in cash. Here are three possible scenarios:

Gain exceeds cash. If the total basis in Yourco shares before the merger was \$8,000, your gain was \$2,750. That’s more than the amount of cash you received, so you report gain of \$900, and your basis in the new shares is \$8,000.

Cash exceeds gain. If the total basis in Yourco shares before the merger was \$10,000, your gain was \$750. You report only \$750 of gain, even though you received \$900 in cash. The other \$150 reduces your basis in the new shares to \$9,850.

Loss. Finally, if the total basis in Yourco shares before the merger was \$12,000, you have a loss on the merger transaction. You can’t report this loss on your return, but you get to receive the \$900 without reporting any gain at all. This reduces your basis in the new shares to \$11,100.

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