tax question on spin offs and acquisitions

November 22, 2005 10:31 AM

capital gains question about stocks that are spun off or purchased

lets say i own company ABC, and am long. then ABC gets bought by DEF. So all my stock in ABC is replaced by some amount of DEF. Am I long on DEF?
Lets say DEF spins off company GHI. Am I long in GHI?

posted by alkupe to work & money (9 answers total)

Yes. to both.

However, remember that in some takeovers the owners of the old company get cash, rather than shares.
posted by Kwantsar at 10:41 AM on November 22, 2005

BTW, you're not "long on DEF," or "long in DEF," you're "long DEF." No prepositions.
posted by Kwantsar at 10:42 AM on November 22, 2005

And since you sort of asked, most takeover/merger related share exchanges are tax-free. Your basis remains intact.

If the merger isn't tax-free to shareholders, the transfer agent will tell you.
posted by Kwantsar at 10:43 AM on November 22, 2005

...and your basis or cost for tax purposes is the original cost of your ABC stock after transaction one.

You figure the basis of transaction two by determing what fraction of DEF's business is represented by GHI and multiplying that number by the original cost of ABC. The remaining basis stays with DEF. Don't forget to deduct expenses and commissions from your cost and add them to your proceeds.
posted by cyclopz at 10:53 AM on November 22, 2005

thanks people.
posted by alkupe at 11:16 AM on November 22, 2005

Oops...add expenses and commissions to cost and deduct from proceeds...I'm financially dyslexic today...
posted by cyclopz at 11:19 AM on November 22, 2005

Oh, and regarding cyclopz's answer, he's right, but usually the company calculates the ratio for you, and you simply apply it.
posted by Kwantsar at 12:26 PM on November 22, 2005

yup...your brokerage firm's reorg department will typically forward a letter with the details.
posted by cyclopz at 1:38 PM on November 22, 2005

dumb question... does the same thing apply if you have a short position?

also to the OP... you didnt expect to be short either of the stocks did you? or did you mean that you were already in long-term capital gain territory?
posted by joeblough at 4:23 PM on November 22, 2005