If you woke up in 2020 with more Apple (AAPL 0.87%) shares than you originally purchased in your account, don't get too excited or start panicking. You're just the recipient of Apple's 4-for-1 stock split and were given 3 additional shares for every one share of Apple stock you owned. The total value of your stocks doesn't change and you don't have to stay up all night learning the latest tax laws. A stock split does not impact your taxable income for U.S. federal income tax purposes -- unless you decide to sell your shares.
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How does a stock split work?
When a stock split occurs for popular company stocks, new investors may be enticed to buy company shares in hopes that they will hit the stock jackpot. But a stock split doesn't increase your earnings; It gives you more shares in your account while keeping the total value of the stocks in your account the same. The shares are just listed at a cheaper price, making the company stock more affordable to a broader range of investors.
For example, let's say you owned one share of stock that was worth $400 before the split. After a 4-for-1 stock split, you now own 4 shares of stock that are valued at $100 per share for a total value of $400. As you can see, the value didn't change -- your stocks are still worth $400. Your original piece of the pie was just split into four different slices.
Kiss your tax anxieties goodbye
So, relax. Stock splits are one move in the markets that won't give you a headache during tax time. Unlike selling a stock or earning dividends, a stock split does not increase your income in itself. You may have received additional shares in your account, but you didn't receive additional money in your hands as a result of the stock split.
A stock split has nothing to do with your tax returns because it is not a taxable event. Any time you receive unexpected "gifts" from major companies, you always have to consider how it will impact your taxes. A stock split is a different type of gift -- it's a gift that adds more shares to your account without you having to do anything in return!
What happens if you sell shares of stock after a stock split?
A stock split gives you the "enjoy your life and forget about taxes" pass -- no action required on your behalf when a stock split occurs. But if you get too antsy and decide to sell shares of stock after a split, there are taxes to pay. The IRS requires you to pay either short-term or long-term capital gains taxes on any profits you receive in the stock market.
Let's say you held your investment in Apple for a year or less (short-term), you will pay the same rate of taxes that you pay on your income from working a job. But you can enjoy a better deal on taxes if you held your investment for over a year (long-term). See the special tax rates for 2020 long-term capital gains below.
|
For single filers with taxable income of... |
For married joint filers with taxable income of... |
For heads of households with taxable income of... |
...this is the long-term capital gains rate |
|---|---|---|---|
|
$0 to $40,000 |
$0 to $80,000 |
$0 to $53,600 |
0% |
|
$40,000 to $441,450 |
$80,000 to $496,600 |
$53,600 to $469,050 |
15% |
|
Over $441,550 |
Over $496,600 |
Over $469,050 |
20% |
DATA SOURCE: IRS.
Earning profits from selling shares of stock comes with more paperwork during tax time -- add Form 8949-Sales and Other Dispositions of Capital Assets to your "to-do" list. Don't panic -- your brokerage firm does most of the hard work for you. You'll receive a Form 1099-B during tax time to help you report your cost basis -- the price you paid for the stock -- as well as short- and long-term capital gains.
But, if you haven't touched your stocks since Apple's stock split in August, you can keep investing and focusing on the long term so you can enjoy those favorable tax benefits!
