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Capital gains tax across buybacks and stock splits
Old 02-06-2015, 06:23 AM   #1
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Capital gains tax across buybacks and stock splits

Curious, not for my own situation but might become relevant in the future.

What happens to the long term capital gains tax when companies do buybacks and stock splits?

As an example:

Let's say you buy one share for 100 USD. Company buys back half its shares that same year, stock price goes up to 200 USD as a result.

10 years later the share is now worth 1000 USD. Company does a 10:1 stock split, now you have 10 shares worth 100 USD.

At this point you sell everything. How much capital gains tax do you owe? Let's take the situation where you in the highest tax bracket.

Thanks!
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Old 02-06-2015, 06:38 AM   #2
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Those events have zero effect. Your total basis for the stock remains $100. You owe long term cap gains on the proceeds minus any broker fee and transaction costs minus the $100 basis. In this case that's $900 minus the fees.

If you sold 5 shares and kept 5, the basis for the sold shares is $50, and your remaining held stock basis is $50.
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Old 02-06-2015, 06:54 AM   #3
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Not a tax expert but my opinion.

If you do not sell your shares through the buyback - no impact on you. Your cost basis remains the same @ $100

On the stock split you now have 10 shares with a total cost basis of $100 or $10/share. The purchase date would remain the same as when you bought the 1 share.

Your Long term capital gains will be $900. currently top LT Capital gains is 20% - so 20% of 900 or $180. Not considering any commissions and fees to buy or sell



Quote:
Originally Posted by Totoro View Post
Curious, not for my own situation but might become relevant in the future.

What happens to the long term capital gains tax when companies do buybacks and stock splits?

As an example:

Let's say you buy one share for 100 USD. Company buys back half its shares that same year, stock price goes up to 200 USD as a result.

10 years later the share is now worth 1000 USD. Company does a 10:1 stock split, now you have 10 shares worth 100 USD.

At this point you sell everything. How much capital gains tax do you owe? Let's take the situation where you in the highest tax bracket.

Thanks!
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Old 02-06-2015, 07:11 AM   #4
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Thank!

So if I understand correctly, if you would sell right after the buyback (share goes to $200 USD) you do owe capital gains tax on the $100 USD gain right?

(still in the very simplified scenario, no transaction costs, highest bracket etc ..)

If so, it's interesting to see that when a company buys back shares (a net cash out!) suddenly one gets a tax liability, just as if it paid dividends ..
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Old 02-06-2015, 09:15 AM   #5
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Originally Posted by Totoro View Post
Thank!

So if I understand correctly, if you would sell right after the buyback (share goes to $200 USD) you do owe capital gains tax on the $100 USD gain right?

(still in the very simplified scenario, no transaction costs, highest bracket etc ..)

If so, it's interesting to see that when a company buys back shares (a net cash out!) suddenly one gets a tax liability, just as if it paid dividends ..
No. In the price appreciation case you have owe no tax until it is sold. And the price could go back down - you don't know what will happen. In the dividend case - when the dividend is paid you owe taxes on it.
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Old 02-06-2015, 02:15 PM   #6
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Quote:
Originally Posted by Totoro View Post
Thank!

So if I understand correctly, if you would sell right after the buyback (share goes to $200 USD) you do owe capital gains tax on the $100 USD gain right?

(still in the very simplified scenario, no transaction costs, highest bracket etc ..)

If so, it's interesting to see that when a company buys back shares (a net cash out!) suddenly one gets a tax liability, just as if it paid dividends ..
If you actually sold it, yes. But not if you held.

The reality on stock buy backs is they generally don't affect the price that much. It's rare that a company would buy back half the shares, for one thing. For another, they are using money that provided value to the company, and many investors would hope that the company could reinvest in the business (open more stores, create new products, etc) to make more profit and therefore drive the price up the normal way, rather than buying back shares.
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Old 02-06-2015, 02:56 PM   #7
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Quote:
Originally Posted by Totoro View Post
Curious, not for my own situation but might become relevant in the future.

What happens to the long term capital gains tax when companies do buybacks and stock splits?

As an example:

Let's say you buy one share for 100 USD. Company buys back half its shares that same year, stock price goes up to 200 USD as a result.

10 years later the share is now worth 1000 USD. Company does a 10:1 stock split, now you have 10 shares worth 100 USD.

At this point you sell everything. How much capital gains tax do you owe? Let's take the situation where you in the highest tax bracket.

Thanks!
Your gain is the difference between the proceeds from the shares sold and your "basis" (what you paid for the shares).

In your scenario, when you buy the shares you own one share with a basis of $100. Buybacks do not affect your basis so when the buybacks occur you still have one share with a $100 basis. Same thing 10 years later.

When the split happens, you now have 10 shares with a basis of $10 each and a total basis for the 10 shares of $100. Since pre-split the one share was worth $1,000, I assume that where you indicate that post-split you have 10 shares at $100 that you mean $100 per share. Right?

If so and you then sell the 10 shares, your proceeds are $1,000 (10 shares sold for $100 each). Your basis in the 10 shares is $100, so your gain is $900.

Your tax on the gain would typically be either $0 or $135 (15% of the $900 gain) depending on what tax bracket you are in.
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Old 02-06-2015, 03:56 PM   #8
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If you actually sold it, yes. But not if you held.

The reality on stock buy backs is they generally don't affect the price that much. It's rare that a company would buy back half the shares, for one thing. For another, they are using money that provided value to the company, and many investors would hope that the company could reinvest in the business (open more stores, create new products, etc) to make more profit and therefore drive the price up the normal way, rather than buying back shares.

Not always.... look at Apple or Exxon.... they are investing as much money as they can without wasting too much of it.... and they still have many 10s of billions of dollars sitting around...

For smaller companies... yes, you hope they can expand and grow....
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