Last month, Tesla (TSLA 1.35%) announced plans to jump on the stock-splitting bandwagon again with a 3-for-1 stock split. Shareholders will have a chance to vote at the 2022 annual shareholder meeting. If approved, shareholders on record by a certain date will receive two extra shares for every one share of Tesla stock they own on the day of the stock split.
If you're planning ahead for tax season, here's how taxes work if you hang on to your extra shares or decide to sell them.
Will a stock split boost your tax liabilities?
Stock splits are back in style, but current investors may not see the immediate impact of it. Although a stock split adds more shares to your account, it doesn't make you richer overnight. It's more like exchanging a $5 bill for five singles. You have more dollars in your hand, but the total money in your wallet is still the same.
Let's say you snatched up two shares of Tesla stock valued at $600 per share before the split. That makes the total value $1,200. After a 3-for-1 stock split, you now own six shares of stock valued at $200 per share. The total value of all your shares will still be $1,200.
Since a stock split doesn't put more cash in your pocket, it's not a taxable event in itself. That means you won't have to worry about the IRS breathing down your neck looking for a piece of the pie. Stock splits are designed to make shares of a stock more affordable to average investors. If the price tag for Tesla was too much for your pockets before, you'll have a better chance of scooping up whole shares after a stock split.
Are there any tax considerations?
Chill. No taxes will be due during tax time if you don't touch your extra shares. You don't have to worry about receiving any unexpected tax forms that will require you to report anything to the IRS following a stock split.
To make you more comfortable with stock splits and taxes, here's a timeline of events to show you why stock splits are not taxable. Let's use Tesla's 5-for-1 stock split in August 2020 as an example.
- August 11, 2020: Tesla announces 5-for-1 stock split.
- August 21, 2020: Shareholders on record by this date qualify to receive four additional shares of common stock on the day of the stock split for each share they owned.
- August 28, 2020: The day of the stock split
- August 31, 2020: Tesla shares start trading on a stock split-adjusted basis.
The timeline above doesn't lead to more money in your pockets. You're just the recipient of more Tesla shares. Therefore, you don't have any tax obligations to report to the IRS.
The same logic will apply to Tesla's 3-for-1 stock split if it takes place. Take a look at the details below, and notice how none of the dates will sound off the IRS alarm:
- March 28, 2022: Tesla announces intentions to pursue a stock split.
- June 6, 2022: All shareholders as of this date will have a chance to vote on the stock split at the annual shareholders meeting.
- June 10, 2022: Tesla reveals plans to pursue a 3-for-1 stock split.
- August 4, 2022: This is the date of the 2022 annual meeting of shareholders.
Here's what happens if you sell your extra shares
If you don't touch your shares after the stock split, you won't have to do any extra work when tax season comes around.
But that's not the case if you decide to sell shares for a profit. Let's say you own six shares of Tesla after the stock split, and you decide to sell three shares. You will have to pay capital gains tax if you sell those three shares at a profit. Your broker will send you Form 1099-B during tax time, so you can report your profits to the IRS. Your taxes will depend on the time you've held your shares before selling them.
Stock splits won't leave you with a tax bill
Stock splits may leave you with extra shares in your investment account, but they won't jack up your tax bill. Since a stock split takes your existing shares and divides them into smaller pieces, you don't profit from it. As long as you hang on to your shares, you won't have to worry about the IRS. On top of that, if you have a high-quality company in your portfolio, you can benefit from future hikes in the stock price that can pay off over the long term.