Question Say I have shares of company A that I've had for years with an original net price of $1000. Company A is then bought by company B with company B "paying" with its shares (no cash) If I then own $2000 of company B shares on the day the buyout takes effect do I owe the capital gains tax on my $1000 profit at that time or only when I sell my compnay B shares for cash?
thanks
Answer Rod, sorry for a slow reply - tax season.
You need to confirm this for each merger/acquisition (website of the acquiring company is a good source) but typically, this type of transaction is mostly tax-free. I say "mostly" because it's unusual for you to get only a round number of Company B shares in exchange for Company A shares. Instead you get something odd, like 47.675 shares. The 47 shares are typically tax-free. But instead of the 0.675 shares, you'll usually get "cash in lieu of fractional shares" (CIL). And that CIL is treated as a sale of that portion of your original stock, so needs to go on your tax return.
The only tricky part is figuring your cost basis in those CIL shares. In my example, assuming the original batch of Company A shares cost $1000 and you received 47.675 shares of B in the merger, the cost basis of those fractional shares is:
$1000 x 0.675/47.675 = $14.16
So on your tax return you report a sale of 0.675 shares of B, for whatever your brokerage statement says you got as "CIL", with a cost basis of $14.16. Your "purchase date" is the original purchase date for the shares of A, not the exchange date when you received shares of B. And the basis of the remaining 47 shares of B is $1000-$14.16. You only report gains on the rest when you sell shares of B.
