Cost basis is the total amount that you paid for an investment, such as a stock. A spin-off occurs when a company divides itself into two or more pieces. If you own stock in a company that has a spin-off, the cost basis you have in the original company is divided amongst the resulting divisions. To calculate your cost basis in the now-separate entities, you must allocate your original cost basis in the same proportion that the company assigns to the resultant companies.
Locate your cost basis for the original company. This is the total amount you paid for the original stock, including any fees or commissions charged by your financial services firm.
Record the closing prices of the two (or more) stocks as of the first day the spin-off traded as an individual company.
Add the closing prices of the mother company and the spin-off.
Calculate the proportion of total combined share price represented by each individual company. For example, if the mother company stock closes at a price of $60 and the spin-off company closes at a price of $40, the combined share price is $100. Of this amount, the mother company comprises 60 percent while the spin-off company represents 40 percent.
Multiply the individual stock proportions by your original cost basis. If your original cost basis was $120 per share and the spin-off receives a 40 percent cost basis allocation, the net cost basis for the spin-off will be $48. The remaining $72 in cost basis is allocated to the original company.
In most cases, the original company will provide shareholders with an allocation factor for the cost basis in the new spin-off.
A spin-off is usually a non-taxable event.