From Valliappa Lakshmanan: “I bought some shares in an Israeli conglomerate (ELBTF) for $12. It recently spun off two companies that trade for about $7 and $4. The original company trades at around $2. I want to retain the spin-offs but sell ELBTF. Now, the question: What is the cost basis for my ELBTF shares? $12? Can I claim $10 in capital losses this year if I sell only the ELBTF shares? (I know the piper has to be paid some time and that the cost basis will then be $0 for the other two shares.) Is my understanding correct or does the IRS have some complicated formula for arriving at the cost basis of my shares?”
Are you serious? Our IRS?
No, you can’t take a whopping loss — or any loss — because you didn’t have one. Basically, you are required to adjust the basis of all three securities (all three of which, incidentally, were acquired, for tax purposes, the date you bought the ELBTF — the clock doesn’t start ticking all over again).
Sometimes the company will send an accountant’s opinion on how you should apportion the original cost. But unless we’re talking about tens of thousands of shares, I wouldn’t be concerned with that. In your case, you paid $12; and when the company issued these new shares, the market valued the resulting three pieces at $13. Just take the proportions the market assigned — seven-thirteenths, four-thirteenths and two-thirteenths — and apply them to your original $12 cost. In other words, 2/13 of your original $12 cost is your new cost basis for the ELBTF shares — $1.85. If you sell them at $2, you have a slight gain, not a loss.
(Technically, the proportions should be based on the prices of the three securities the day the two new ones were spun off, not the day you wrote me your message. But it doesn’t sound as if it will be much different.)
Quote of the Day
Markets are very good at what they do, in part because they harness greed and envy (in fact, all of the Seven Deadly Sins except sloth) and turn them into positive virtues.~Rocky Mountain Institute newsletter
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