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

30.3 Sale of Stock Dividends

A sale of stock originally received as a dividend is treated as any other sale of stock. The holding period of a taxable stock dividend (4.8) begins on the date of distribution. The holding period of a tax-free stock dividend or stock received in a split (4.6) starts from the time you acquired the original stock.

EXAMPLE

You bought 100 shares of X Co. stock on December 3, 1999. On August 10, 2012, you receive 10 shares of X Co. stock as a tax-free stock dividend. On December 14, 2012, you sell the 10 shares at a profit. You report the sale as long-term capital gain because the holding period of the 10 shares goes back to your original purchase date of December 3, 1999, not August 10, 2012.

Basis of tax-free dividend in the same class of stock.

Assume you receive a common stock dividend on common stock. You divide the original cost by the total number of old shares and new shares to find the new basis per share.

EXAMPLE

You bought 100 shares of common stock for $1,000, so that each share has a basis of $10. You receive 100 shares of common stock as a tax-free stock dividend. The basis of your 200 shares remains $1,000. The new cost basis of each share is now $5 ($1,000 ÷ 200 shares). You sell 50 shares for $560. Your profit is $310 ($560 − $250).

Basis of tax-free dividend in a different class of stock.

Assume you receive preferred stock dividends on common stock. You divide the basis of the old shares over the two classes in the ratio ...