Financial calculations are complex and depend on specific tax laws. Consult a tax professional for personal advice.
Use this specialized calculator to accurately determine the new cost basis for your retained Parent stock and the newly received Spinoff stock after a corporate spin-off. This calculation is essential for determining future capital gains or losses when you sell the shares.
How to Calculate Cost Basis on a Spin-Off
New Cost Basis Allocation
Detailed Steps
How to Calculate Cost Basis on a Spin-Off Formula
Total FMV = Parent FMV + Spinoff FMV
Parent Allocation Ratio (RP) = Parent FMV / Total FMV
Spinoff Allocation Ratio (RS) = Spinoff FMV / Total FMV
New Parent Basis = Original Basis × RP
New Spinoff Basis = Original Basis × RS
Formula Source: IRS & InvestopediaVariables Explained
- Original Aggregate Basis (OB): The total cost you originally paid for the Parent company stock, including any commissions.
- Parent Stock FMV After Spin-off (FMP): The Fair Market Value of the Parent stock (retained shares) immediately after the spin-off, typically measured on the distribution date.
- Spinoff Stock FMV After Spin-off (FMS): The Fair Market Value of the new Spinoff stock immediately after the spin-off.
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What is Cost Basis on a Spin-Off?
A corporate spin-off occurs when a large company (the Parent) splits off a part of its business into a separate, independent company (the Spinoff) by distributing new shares of the Spinoff company to the Parent company’s existing shareholders. For tax purposes, this distribution is usually tax-free.
Crucially, the IRS requires that you allocate your original total cost basis (the price you paid for the Parent company shares) between the retained Parent stock and the new Spinoff stock. This is done based on the relative Fair Market Values (FMV) of the two stocks immediately following the spin-off.
This reallocation is essential because it determines the **adjusted cost basis** for each set of shares. When you eventually sell either the Parent or Spinoff stock, the adjusted cost basis is used to calculate your taxable capital gain or loss. Failing to calculate this correctly can lead to significant tax errors.
How to Calculate Cost Basis (Example)
- Determine Original Basis: You purchased 100 shares of Parent Co. for a total cost of $10,000 (Original Aggregate Basis).
- Find FMVs Post-Spin-off: On the distribution date, the Parent stock you retained has a total FMV of $7,500, and the new Spinoff stock you received has a total FMV of $2,500.
- Calculate Total FMV: $7,500 (Parent FMV) + $2,500 (Spinoff FMV) = $10,000.
- Determine Allocation Ratios:
- Parent Ratio: $7,500 / $10,000 = 0.75 or 75%
- Spinoff Ratio: $2,500 / $10,000 = 0.25 or 25%
- Calculate New Cost Basis:
- New Parent Basis: $10,000 (Original Basis) × 0.75 = $7,500
- New Spinoff Basis: $10,000 (Original Basis) × 0.25 = $2,500
Frequently Asked Questions (FAQ)
What is the distribution date FMV?
The Fair Market Value (FMV) used for basis allocation is typically the closing price of both the Parent and Spinoff stock on the first day the Spinoff stock traded “regular way” (often the distribution date). Your broker should provide this information on Form 1099-B or a cost basis statement, but you are responsible for verifying it.
Is a spin-off a taxable event?
Generally, no. Most corporate spin-offs are structured as tax-free distributions under Section 355 of the Internal Revenue Code. However, you still must reallocate your cost basis, which is a mandatory tax procedure. If cash-in-lieu of fractional shares is received, that portion may be taxable.
What if the Spinoff stock has a zero cost basis?
The IRS requires allocation based on relative FMV. A zero basis is usually incorrect for tax-free spin-offs and often results from a broker failing to correctly adjust the basis. Using a zero basis will overstate your taxable gain when you sell the Spinoff shares.
Why do I need to re-calculate the basis?
The original cost you paid for the Parent shares now covers ownership in two separate companies. The new basis ensures that you are only taxed on the actual profit (or loss) generated from each stock from the date of the spin-off onward.