30.4 Stock Rights

The tax consequences of the receipt of stock rights are discussed at 4.6. The following is an explanation of how to treat the sale, exercise, or expiration of nontaxable stock rights. The basis of taxable rights is their fair market value at the time of distribution.

Expiration of nontaxable distributed stock rights.

When you allow nontaxable rights to expire, you do not have a deductible loss; you have no basis in the rights.

Sale of nontaxable distributed stock rights.

If you sell stock rights distributed on your stock, you treat the sale as the sale of a capital asset. The holding period begins from the date you acquired the original stock on which the rights were distributed.

Purchased rights.

If you buy stock rights, your holding period starts the day after the date of the purchase. Your basis for the rights is the price paid; this basis is used in computing your capital gain or loss on the sale.

If you allow purchased rights to expire without sale or exercise, you realize a capital loss. The rights are treated as having been sold on the day of expiration. When purchased rights become worthless during the year prior to the year they lapse, you have a capital loss that is treated as having occurred on the last day of the year in which they became worthless.

Planning Reminder

Exercise of Stock Rights

You realize no taxable income on the exercise of stock rights. Capital gain or loss on the new stock is recognized when you later sell the stock. The holding period of the new stock begins on the date you exercised the rights. Your basis for the new stock is the subscription price you paid plus your basis for the rights exercised.

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Figuring the basis of nontaxable stock rights.

Whether rights received by you as a stockholder have a basis depends on their fair market value when distributed. If the market value of rights is less than 15% of the market value of your old stock, the basis of your rights is zero, unless you elect to allocate the basis between the rights and your original stock. You make the election on your tax return for the year the rights are received by attaching to your return a statement that you are electing to divide basis. Keep a copy of the election and the return.

If the market value of the rights is 15% or more of the market value of your old stock, you must divide the basis of the stock between the old stock and the rights, according to their respective values on the date of distribution.

No basis adjustment is required for stock rights that become worthless during the year of issue.