I’ve received emails from accountants on how to craft responses to questions from clients. I’ve edited and condensed the questions for clarity and brevity.
Q: A company in which I own stock declared a 50 percent stock split, an action increasing the number of my shares from 200 to 300. I plan to keep 150 of the post-split shares and sell the other 150. The original investment cost me $3,000. How do I figure my cost for the shares I sell?
A: The split makes it necessary to recalculate your cost basis. First, divide the amount invested ($3,000) by the total number of shares (300) to determine the adjusted cost per share ($10). Then multiply the adjusted cost by the number of shares sold ($10 x 150 = $1,500). To determine your gain or loss, offset the $1,500 against the sales price.
Q: I placed money in a mutual fund that’s part of a family of funds. There’s no charge if I shift from one fund to another. What if I choose to switch and show a capital gain? Is the tax deferred to the time I sell the new shares?
A: No. The gain is taxable as of the date you switched. It makes no difference that the funds are under one management. The law treats any switch as a separate sale and purchase, meaning you have to report your gain or loss each time you switch.
However, you’re excused from this reporting requirement when the fund holds money stashed in a traditional IRA or some other kind of tax-deferred retirement plan; nothing need be reported in the event a switch occurs.
Q: My parents gave me 100 shares of stock 12 years ago, and six years ago I bought another 50 shares. This year I sold them because we bought a house. How do I figure how much gain I have to pay tax on? I don’t have exact figures, but I can look them up.
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.