How to Figure the Average Cost Basis After a Reverse Stock Split
Original post by Nola Moore of Demand Media
In a reverse stock split, a company decreases the total number of outstanding shares without affecting the stock's intrinsic value or the total market value of all shares. If a stock you own goes through a reverse split, you need to adjust the cost basis -- the amount you paid for the stock -- to reflect the change to make sure that you monitor and report the correct gain or loss.
Collect data for each historical purchase and sale. You need to know the number of shares in each transaction, the cost of each share, and any commissions and fees you paid. On many statements, this will show up as a lump dollar value, such as "purchased 20 shares for $47.80" rather than "purchased 20 shares at $2 each."
Add up the total cost of all share purchases. This is the total original cost.
Divided the total original cost by the total number of shares purchased. This is the orginal cost per share.
Add up all shares you sold prior to the reverse split and multiply this number by the original cost per share. Subtract this number from the total original cost to get the average pre-split cost basis.
Divide the pre-split cost basis by the number of shares you hold after the reverse stock split. This is the average cost per share, after the reverse stock split.
Tips & Warnings
- If you bought and sold the stock several times, calculate your cost basis only on those shares you purchased since the last time you held zero shares, not your full history with the stock.
- Statements or receipts showing all stock purchases and sales
- Internal Revenue Service: Publication 550 -- Investment Income and Expenses
- CostBasis.com: Stock Splits
- American Century: How a Reverse Share Split Works
About the Author
Nola Moore has been writing articles since 1999. Based in Santa Monica, Calif., Moore writes and blogs about taxes, trading and trusts for a variety of publications including BankShout, CreditShout and various other websites. She holds a Bachelor of Science in retail merchandising and spent nearly a decade in trust and investment services before leaving Minnesota for the beach.