Stock Cost Basis


7

704set

CVC is paying a special dividend of $10 this week. The
dividend will be a return of capital, thus there is no tax
consequence. But the stockholder's cost basis will be
reduced by $10.

My question is what is your new cost basis if you paid $8 for the stock?

704set
 
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R

Rich Carreiro

704set said:
CVC is paying a special dividend of $10 this week. The
dividend will be a return of capital, thus there is no tax
consequence.
Not quite -- see below!
But the stockholder's cost basis will be
reduced by $10.
Only if the basis is at least $10
My question is what is your new cost basis if you paid $8 for the stock?
Basis can only be reduced to zero. After all, return of
capital distributions become taxable as capital gain (long
or short, depending how long you've held the underlying
shares).

So in the case you give, the $10 ROC distribution reduces
the basis from $8 to zero and creates $2 of capital gain.
Future ROC distributions will be wholly taxable, since basis
is now zero.
 
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H

Herb Smith

704set said:
CVC is paying a special dividend of $10 this week. The
dividend will be a return of capital, thus there is no tax
consequence.
Not quite correct about "no tax consequence". That would
only be true if the ROC is LESS than the current basis of
the stock.
But the stockholder's cost basis will be
reduced by $10.
True, only if the cost basis is greater than the ROC
payment. You can't reduce cost basis to less than zero.
My question is what is your new cost basis if you paid $8
for the stock?
$8 of the ROC payment will reduce the cost basis to zero.
The other $2 is taxed as capital gain (even though you don't
actually sell the stock).

End result, there ARE tax consequences!
 
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7

704set

Herb Smith said:
704set wrote:
Not quite correct about "no tax consequence". That would
only be true if the ROC is LESS than the current basis of
the stock.
True, only if the cost basis is greater than the ROC
payment. You can't reduce cost basis to less than zero.
$8 of the ROC payment will reduce the cost basis to zero.
The other $2 is taxed as capital gain (even though you don't
actually sell the stock).

End result, there ARE tax consequences!
Thanks, everyone.

704set
 
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