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But, many times life isn't easy. Stock splits don't always happen in "even" lots. There can be "odd" lots involved, so the split produces fractional shares that are sold by the company.
Example #1: You own 55 shares of ABC Corp. stock. You bought these shares two years ago for $125 per share. You also paid $20 in commission for the purchase, which would make your total cost basis in these shares $6,895.00 (55 shares X $125 per share, plus $20).
This year, the Board of Directors of ABC Corp. decided to declare a 3for2 stock dividend. The board declared that each shareholder would receive 0.5 new shares of ABC stock for every share currently owned.
Since you own 55 shares of stock currently, how many shares will you own after the split? The math works like this: Take your 55 shares and divide by 2. That gives you 27.5. Add those 27.5 shares to your original 55 shares, an you now have 82.5 shares of ABC.
And, as you learned in Part I, you simply take your original cost basis and divide it by the total number of shares you now have (both new and old) to arrive at your new "pershare" cost basis. But wait, we have a fractional share  onehalf share, in fact  that might give us a bit of a problem.
Remember that companies will not issue fractions of shares (dividend reinvestment plans being the exception to the rule, of course). Instead, the company will purchase that fractional share from you at the fair value of the stock on the date your new shares are issued.
At the end of the year, the company will send you IRS Form 1099B, which will report this sale to Uncle Sammy and to you. Just remember, this is a real, live sale that must be reported on Schedule D on your tax return. So, be prepared to adjust your cost basis for the stock dividend, compute your basis for this fractional share, and report the sale on Schedule D at tax time. Let's see how the computations work.
Example #2: Using the same facts as in example #1, let's now assume that the ABC Corp. issued you an additional 27 whole shares, sold off your fractional share at a fair market value (FMV) of $90 per share, and sent you a check for $45.00 (proceeds from selling the half share).
You now have the "sale" end of the transaction accounted for, but what is your cost basis in this half share? The theory is the same as we discussed in Part I  simply spread your entire original cost basis over all of your shares. And, that means all of them... even the fractional shares. Since your original cost basis is $6,985.00, and after the split you had a total of 82.5 shares, your cost basis per share is $84.67 (total cost basis of $6,985.00 divided by 82.5 shares).
So, your new pershare cost basis is $84.67. Simple division tells you that your fractional share (a half share) has a cost basis of $42.33. When you received your check from the ABC Company for $45.00, representing the sale of the fractional share, your cost basis for that half share would be $42.33 and your gain on the sale would be $2.67 ($45.00 minus $42.33). This information is required to be reported on Schedule D. Also, remember that your holding period for this share reaches all the way back to your original purchase date  which qualifies it as a longterm capital gain on this fractional share sale.
This may seem like a lot of work for such little consequence, but this is what is required by the Internal Revenue Code. Many people will tell you simply to report the fractional share sale on Schedule D with no basis against the sale  using the entire sale proceeds ($45.00 in this case) as your gain  and then calculate your new pershare cost basis using just the number of full shares you have (82 shares in our example). While this is not the technically correct procedure, and not one that I recommend, I can't deny that it is done many times. But regardless of how you handle the fractional share sale, you must still allocate your basis correctly over both the old and new shares.
So, let's doublecheck our math and see where we stand with our remaining shares. We now have 82 total shares. The total cost basis for those shares is $6,942.67. We get that amount by taking the original cost basis of $6,985.00 and subtracting the cost basis for the fractional share that was sold ($42.33). Just like before, calculate the pershare cost by dividing your total cost basis (now $6942.67) by your total number of shares (82), and you arrive at a pershare basis of $84.67. Since this is exactly the same amount we arrived at when we completed the first computation (which is exactly the way it should be), it confirms that your math was done correctly.
That is how you deal with fractional shares in a stock split. As you can imagine, the number can get a little more complicated, but the theory will still remain the same. You spread your basis over all of your shares. If you do that, and are careful with your computations, you'll never go wrong when computing the cost basis on fractional shares sold.
But, remember that fractional shares sold because of a stock split are not exactly the same as fractional shares sold when a company goes through some type of reorganization, or stock swap, or stock splitup, or stock buyout. Those rules are completely different, and are completely separate and apart from the rules noted above. We look at them in greater detail in Part III.