Stock sales are usually straightforward transactions. A stockholder decides to sell a security and receives a certain amount of money per share sold. Capital gains tax must be paid if the sale was in a retail, or non-qualified account. The sale is reported on an Internal Revenue Service capital gains and loss report. Sometimes small dealings morph into a shareholder's tax headache. Cash in lieu transactions can be one of these times.
Tax Reporting of Cash in Lieu Transactions
The IRS considers cash for a fractional share to be money received as the result of a stock sale. The sale is reported to the owner on the year-end 1099-B form brokerage firms send to account holders listing all security sales. Compile the following data necessary to report a cash in lieu, CIL, transaction: year-end 1099-B form, original stock cost basis information and the date of purchase or the date the stock was acquired, and the value of the new stock received on the merger date.
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The CIL transaction must be reported on IRS tax form Schedule D Capital Gains and Losses. Download the instructions for completing Schedule D from the IRS website. A Schedule D form also can be downloaded.
The date of the CIL sale and the date of the original stock purchase is needed to complete the tax form. The date of the sale is the date of the merger, stock split or other transaction. The sale date should be on the 1099-B form received from the brokerage firm. The purchase date is the date the original stock was acquired.
The cost basis of securities sold is listed on the tax form when reporting gains and losses. Many people report the cost basis of the fractional share sold as zero rather than attempt to figure out the new cost basis of the fractional share. The correct method is to allocate the adjusted cost basis of all the shares to the fractional share. Assuming the transaction was an all stock transfer, calculate the cost basis of the new shares by dividing the total number of new shares by the cost basis of the original shares. The result is the new cost basis per share. Multiply the new cost basis by the fractional share -- for example 0.5 for half a share. The result is the cost basis for the fractional share. This cost basis number is reported on Schedule D.
A merger or other transaction is considered a tax-free reorganization if at least half of the monetary value of the arrangement is in stock. Sometimes stock and cash is allocated as part of a merger deal. The new cost basis calculation needs to account for the cash received. The newly owned company publishes the total value -- accounting for new stock and cash received -- of each share converted on the merger date. The information is typically available on the company website in the investor relations section. The information includes cost basis formulas that make calculating the new cost basis of shares received and the fractional cash in lieu, CIL, share straightforward. If the data is unavailable, there is always the option of reporting zero for the cost basis of the fractional share on the tax form.
The CIL transaction is only reported for taxable accounts -- transactions in qualified accounts (IRA, 401k, etc.) are not reported.
Usually CIL payments are not large. The capital gains due when reporting a zero cost basis is rarely a lot of money; weigh the amount against the time in calculating cost basis.
Cost basis eventually will have to be calculated for new stock received. Cost basis can be calculated by subtracting the original stock cost basis and the cash received from the stock value on the merger date. Sometimes cash and stock received are percentages that have to be allocated accordingly; use the information and formula provided by the company to accurately compute the new cost basis.