Stock Splits and Taxes: Understanding the Impact

Stock splits divide cost basis among more shares without increasing tax liabilities. When a stock split occurs, a bookkeeping adjustment to cost basis should be made. Cost basis is the amount paid to purchase the stock and is subtracted from the sale price to determine profit. A stock split increases the number of shares and decreases the cost basis per share.

Example:

100 shares of stock purchased at $20 per share

Cost basis = $20 per share

After 2 for 1 stock split the holding becomes

200 shares of stock (2 shares issued for every 1 share held)  

Cost basis = $10 per share ($20 per share original cost basis, divided by 2).

When adjusting cost basis for a stock split, you must assign each share in the lot the same basis. You cannot keep your 100 shares at the original $20 cost basis while adding 100 additional shares with a zero cost basis.

Ultimately your tax liability remains the same after a stock split. When you sell, you will compute profit as though you had originally purchased 200 shares at $10.