Questions about stock splits and cost basis?

Question

I found bits and pieces of my question in other posts but I am going to ask it here in whole. Thanks.

A company thinks their stock is overvalued and doubles the number of outstanding shares (e.g. 2 for 1 split) and cuts the price in half resulting in no immediate market value change.

As an investor you see in your brokerage account the number of shares double while the price falls by half resulting in a net market value change of zero.

What about your cost basis?

Let's say you have only been buying shares (never sold any) of one stock and that you are using the average cost basis your broker calculates for you. All of a sudden the price of those split shares dropped by 50% so if you decided to sell some shares right after the spilt could you potentially even sell at a capital loss and get a tax deduction (more likely the taxable earnings will be less)?

Basically how is your cost basis effected since the stock's price "artificially" went down? Good time to sell?

Kate:

Thanks for the reply. I see. I guess I was indirectly asking whether the stock spilt would somehow change the recorded price at which I bought my shares way back when.

Even though the price change was not due to market activity that has no affect on the recorded price at which I bought them. I have better understanding now. Cool.

Answer 1

The current stock price is NOT your cost basis .

If you bought 100 shares of IBM at 100 , ( $10,000)
Then they split 2 for 1
You would now have 200 shares @ $50 cost basis . ($10,000) .

Your total $$$ spent on the purchase (cost basis) remains the same , and has nothing to do with the current trading price .

If you bought blocks on separate dates ,
You need to run the calculation for each purchase date with the Total cost basis always remaining the same for that date ,
Just the shares & share price are adjusted .

>

Answer 2

As you are aware. Stock Splits mean nothing.

Your cost basis is what you paid to purchase. Your net proceeds are what you got when sold. Simple. The gov't doesn't care about splits or what the stock price was. They want to know your profit/loss.

The gov''t knows about "stock splits", they're not going to be fooled.