30.3 Sale of Stock Dividends

A sale of stock originally received as a dividend is treated as any other sale of stock. The holding period of a taxable stock dividend (4.8) begins on the date of distribution. The holding period of a tax-free stock dividend or stock received in a split (4.6) starts from the time you acquired the original stock.

EXAMPLE
You bought 100 shares of X Co. stock on December 3, 1999. On August 10, 2012, you receive 10 shares of X Co. stock as a tax-free stock dividend. On December 14, 2012, you sell the 10 shares at a profit. You report the sale as long-term capital gain because the holding period of the 10 shares goes back to your original purchase date of December 3, 1999, not August 10, 2012.

Basis of tax-free dividend in the same class of stock.

Assume you receive a common stock dividend on common stock. You divide the original cost by the total number of old shares and new shares to find the new basis per share.

EXAMPLE
You bought 100 shares of common stock for $1,000, so that each share has a basis of $10. You receive 100 shares of common stock as a tax-free stock dividend. The basis of your 200 shares remains $1,000. The new cost basis of each share is now $5 ($1,000 ÷ 200 shares). You sell 50 shares for $560. Your profit is $310 ($560 − $250).

Basis of tax-free dividend in a different class of stock.

Assume you receive preferred stock dividends on common stock. You divide the basis of the old shares over the two classes in the ratio of their values at the time the stock dividend was distributed.

EXAMPLE
You bought 100 shares of common stock for $1,000. You receive a tax-free dividend of 10 shares of preferred stock. On the date of distribution, the market value of the common stock is $9 a share and that of the preferred stock is $30. That makes the market value of your common stock $900 and your preferred stock $300. So you allocate 75% ($900 ÷ $1,200) of your $1,000 original cost, or $750, to your common stock and 25% ($300 ÷ $1,200) of your cost to the preferred stock.

Basis of taxable stock dividend.

The basis of a taxable stock dividend (4.6) is its fair market value at the time of the distribution. Its holding period begins on the date of distribution. The basis of the old stock remains unchanged.

EXAMPLE
You bought 1,000 shares of stock for $10,000. The company gives you a choice of a cash dividend or stock (one share for every hundred held). You elect the stock. On the date of the distribution, its market value was $15 a share. The basis of the new stock is $150 (10 × $15), the amount of the taxable dividend. The basis of the old stock remains $10,000.
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