J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

6.8 Tax-Free Exchanges of Stock in Same Corporation

Gain on the exchange of common stock for other common stock of the same corporation is not taxable. The same rule generally applies to an exchange of preferred stock of the same corporation, but not if “nonqualified” preferred with special redemption rights or a varying dividend rate is received. Loss realized on a qualifying exchange is not deductible. The exchange may take place between the stockholder and the company or between two stockholders.

An exchange of preferred stock for common, or common for preferred, in the same company is generally not tax free, unless the exchange is part of a tax-free recapitalization. In such exchanges, the company should inform you of the tax consequences.

Convertible securities.

Conversion of securities under a conversion privilege is tax free (30.7).