Capital Gains, Losses/Sale of Home > Stocks (Options, Splits, Traders)

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Frequently Asked Tax Questions

Capital Gains, Losses/Sale of Home - Stocks (Options, Splits, Traders)

Rev. date: 1/2010

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?

Basis
Capital Gains and Losses
Cost Basis
Investment Income and Expenses
Publication 551
Sale of Property, Gain or Loss
Stock Sale
Stock Split

If the old stock and the new stock are identical:

The basis of the old shares must be allocated to the old and new shares.
The per share basis is determined by dividing the adjusted basis of the old stock by the number of shares of old and new 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.

Rev. date: 1/2010

Do I need to pay taxes on the additional stock that I received as the result of a stock split?

Capital Gains and Losses
Investment Income and Expenses
Stock Split

No, a stock split does not increase your wealth; you merely receive more stock certificates evidencing the same ownership interest in the company that issued the stock.
Your overall cost basis is not changed as a result of a stock split, but your per share basis is changed.
You will need to adjust your basis per share of the stock. If you realize a gain when you sell the stock, you will have to include the gain in income. Gain is the amount by which the proceeds from the sale, minus sales commissions, exceed the adjusted basis of the stock sold.

Rev. date: 1/2010

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?

Capital Gains and Losses
Form 1099-B
Information Returns
Investment Income and Expenses
Short Sale
Stock Sale

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 you Form 1040, Schedule D (PDF), Capital Gains and Losses that will allow you to reconcile your Form 1099-B (PDF) to your Form 1040, Schedule D (PDF) 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 was 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 specific rules refer to Publication 550, Investment Income and Expenses.

Rev. date: 1/2010

I purchased stock from my employer under an employee stock purchase plan. Now I have received a Form 1099-B from selling it. How do I report this?

Capital Gains and Losses
Employee Stock Ownership Plan
Form 1099-B
Information Returns
Investment Income and Expenses
Stock Options
Stock Sale
Stock options Employee stock purchase plans

The holding period requirement is satisfied if:

You do not sell the stock within 1 year after the option is exercised.
You do not sell the stock within 2 years after the option is granted.

If the special holding period requirement:

Is satisfied, the sale of stock is treated generally as giving rise to capital gain or loss. You may have compensation income if the option price was below the stock's fair market value at the time the option was granted; or
Is not satisfied, the compensation income that you should report in the year of the sale is the amount by which the fair market value of the stock at the time of purchase (or vesting, if later) exceeds the exercise price. Any additional gain or loss is treated as capital gain or loss.

If the holding period requirement is satisfied but the option exercise 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 on Form 1040, Line 7.
If 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 sum of the amount you paid for it plus the amount reported as compensation, your loss is a capital loss, but you still may have ordinary income.

Rev. date: 1/2010

How do I report participation in an employee stock purchase plan on my tax return?

Employee Stock Ownership Plan
Investment Income and Expenses
Stock options Employee stock purchase plans

If you participated in an 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.
You may have to report compensation (Form 1040, Line 7) and capital gain or loss (Schedule D, Form 1040) when you sell the stock.
The amount of compensation and capital gain or loss depends on whether you satisfy the holding period requirement.

The holding period requirement is satisfied if:

You do not sell the stock within 1 year after the option is exercised.
You do not sell the stock within 2 years after the option is granted.

Rev. date: 1/2010

How do I figure the cost basis when the shares I'm selling were purchased at various times and at different prices?

Basis
Cost Basis
Investment Income and Expenses
Mutual Fund Distributions
Stock Sale

If you can identify which shares of stock you sold, your basis is:

What you paid for the shares sold plus any costs of purchase.
The total of all the acquisition costs of all the shares sold if you sell a block of the same kind of stock and you report all the shares sold at the same time as one sale.

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.

Rev. date: 1/2010

How do I compute the basis for stock I sold, when I received the stock over several years through a dividend reinvestment plan?

Basis
Cost Basis
Dividend
Dividend Reinvestment
Investment Income and Expenses
Publication 551
Stock Sale

The basis of stock that you received through a dividend reinvestment plan:

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 reconstruct those records with the help of public records from sources such as the media, your broker, or the company that issued the dividends.
The basis must be determined by using the first-in first-out rule if you cannot specifically identify which shares were sold.

The first-in first-out rule means:

That you deem that you sold the oldest shares first, then the next oldest, until you have accounted for the number of shares sold.
You need to have kept adequate documentation of all your purchases, including those that were made through the dividend reinvestment plan in order to establish the basis of these shares.
You may not use an average cost basis. If certain conditions are satisfied, an average cost basis may be used for mutual fund shares.

Rev. date: 1/2010

How are reinvested dividends reported on my tax return?

Dividend Reinvestment
Form 1040 or 1040A (Schedule B)
Investment Income and Expenses

Reinvested dividends:

Are reported with your other dividends, if any, on Form 1040 (PDF) or Form 1040A (PDF).
Are combined with your ordinary dividends. If the total exceeds a specific dollar amount set by law, you must file either Form 1040 Schedule B (PDF) and report the dividends on that form.
Are not actually shown as reinvested dividends on your return; they are reported as dividends.
Occur when 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.
Must be reported at the fair market value on the dividend payment date on your tax return.

NOTE: Keep records of the dollar amount of the reinvested dividends, the number of additional shares purchased, and the purchase dates. You will need this information to establish your basis when you sell the shares.


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