If a company you own has gone through a major shakeup in the past year -- including merging with another business, or spinning off one of its divisions -- the IRS will take an interest. Successful investors must pay close attention to the tax implications of big events like these.
The market's full of recent examples of notable moves:
- Time Warner (NYSE: TWX ) spun off AOL this past year.
- Bristol-Myers Squibb (NYSE: BMY ) traded the remainder of its stake in Mead Johnson Nutrition to Bristol shareholders.
- Kraft (NYSE: KFT ) is buying Cadbury (NYSE: CBY ) .
- Comcast (Nasdaq: CMCSA ) is purchasing NBC from its current majority owner, General Electric (NYSE: GE ) .
Many of these transactions won't create an immediate taxable event. But if you own shares in an affected company, you may see a change on your brokerage statement. Instead of (or in addition to) owning 200 shares of Company A, you may find that you now own 50 shares of Company B. That may seem simple enough, but it can get complicated when the time comes to sell your shares -- because your original cost basis of, say, $17.50 per share in Company A no longer applies. And you'll need a cost basis in your Company B shares to calculate your gain or loss for tax purposes when you sell them.
To arrive at your needed cost basis, you'll need to do some research. The best resource is usually the company itself, which should be able to provide you with a formula to help translate your cost basis in the original company to a cost basis for the current company. Companies will often mail out instructions and a formula to shareholders automatically -- keep an eye out for such a communication, usually arriving via your broker.
To get an idea of what the calculations can look like, check out AT&T (NYSE: T ) . It has gone through so many changes that it sensibly keeps its formulas available on its website.
Finally, sometimes a holding of yours may be bought out for cash. If so, you may just suddenly see the stock disappear from your list of holdings one day, in exchange for a new pile of cash in your account balance. That isn't as tricky, but you will have to report that transaction in your taxes for the year in which it took place.
Whatever type of transaction a company does, it's smart to go through the necessary calculations as soon as possible. Even if you don't plan to sell your newly acquired stock anytime soon, adjusting your basis will help you see how much you've gained or lost at any point. And whenever you do decide to sell, you won't have to dig up the formulas you need -- which could save both you and the IRS a whole lot of hassle.