How to Adjust Cost Basis After a Merger
2/21/2014 4:00:00 PM

If in your taxable account, you held stock in a company acquired by another company in a merger, you need to adjust your cost basis to compute capital gains or losses. Merger considerations may come in all cash, all stock of the acquiring company, or a combination of stock and cash (also known as cash to boot). You must calculate your original cost basis for the stock and the cash proceeds you receive after completion of the merger. As an example, suppose that on Jan 1, 2010, you bought 200 shares of Company A for $25.49. On Jan 1, 2013, a merger is declared, in which Company A is acquired by Company B, with the following three options for each share of Company A you own: (i) $50 in cash, (ii) 1.049 shares of Company B or (iii) a mix of $25 in cash plus 0.5245 shares of Company B, subject to proration, which means shareholders electing the oversubscribed option of either cash or stock will get the undersubscribed option instead, on a prorated basis. You elect all cash, but because of oversubscription to the cash option when the merger is completed in June 1, 2013, you end up with 98 shares of Company B, $5297.18 cash, and $31.72 cash-in-lieu of shares.

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