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Capital Gains for Corporate Reorganizations

Issue

How will corporate reorganizations of companies that you own stock in affect your capital gains and losses?

Analysis

Source: IRS Publication 550

There are several instances where a company which you own stock in will give you new stock in exchange for your old stock. In these cases, if the exchange was the result of a merger, recapitalization, transfer to a controlled corporation, bankruptcy, corporate division, corporate acquisition, or other corporate reorganization, you do not have to recognize any gain or loss at the time of the exchange. Your total basis in stock will usually remain unchanged, but may have to be allocated between old and new stock.

The exchanges that are included are:

  • Common stock for preferred stock
  • Preferred stock for common stock
  • Stock in one corporation for stock in another corporation.

If you exchange all of the old stock for the new stock, there will be no change in basis. If you exchange only a portion of old stock for the new stock then you will need to allocate a portion of the basis to the new stock. Usually the corporation will provide you with an allocation percentage.

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