What is the cost basis of shares received as dividends in a split?
Do the shares you receive as dividends have 0 cost basis or do they have a basis equal to, say the opening price on the ex-dividend day?
Here's why the question is relevant for the discussion concerning the role of splits in pricing:
Case #1: Suppose you buy 1000 shares of IOMG at 10, it goes to 20, and you sell half your position (500 shares) for $10,000 to get out your original investment. You have to pay taxes (say 28%), on $5,000 profit. So you pay uncle sam $1400, which leaves you $8600 to reinvest in another great stock.
Case #2: Suppose you buy 1000 shares of IOMG at 10, it goes to 20, it splits 2 for 1, and you sell half your position (1000 shares) for $10,000 to get out your original investment. The shares you sold are the same shares you bought (First-In First-Out accounting), so their sale price is the same as their cost basis ($10/share). Consequently, you have no profit and you owe no taxes on this sale. You have a full $10,000 to reinvest.
Of course you wouldn't get something for nothing. The 1000 shares you received as a dividend from a split, would have swallowed up your tax liability.
So the question is, do the shares you receive as dividends have 0 cost basis or do they have a basis equal to, say the opening price on the ex-dividend day? If the former is true then I see a good fundamental reason why the stock price should rise on the announcement of a dividend, on the other hand if the latter is the case, then I would have to concur that the run-up in price is probably just psychological.
Any tax experts out there? With real (as opposed to speculative answers?)
--Fernando
(long IOMG) |
