Treatment of employee stock shares after acquisition

[william-orejudos]

Suppose the following scenario occurs:

An employee of company A has 1000 vested shares of company A
company B purchases company A
As part of this acquisition, employees of company A can chose to receive from amoung the following:
- a payout of $5.00 per company A share
- vested shares in company B, at the ratio of 0.3 company B shares per company A share
-  A combination: a payout of $2.50 per company A share, AND company B shares at the ratio of 0.15 shares per company A shares.

So someone with 1000 company A shares who chooses this last option would get a payout of $2500 and also get 150 vested company B shares.

How would the reporting of investment income be done in this case? For the cash portion of $2500 it is pretty clear - cost basis is the Fair Market Value of the 1000 company A shares at the time those shares vested, and the proceeds is the cash amount of the payout, $2500. This is what will be on the 1099-B. But what about the 150 company B shares that were received? Does the value of these shares need to be reported somewhere?

[AmyC]

The 150 shares are a tax free exchange of stock for stock. Let's work through the cash received to get the value of the 150 shares.

The cash portion:

realized gain: cash + FMV of new stock minus total basis in company A (w2 income over the years plus any amount paid for shares)

recognized gain: limited to the lower of either the realized gain or the cash received = $2500

The 150 shares:

Your new basis in Company B stock = Basis in Company A minus $2500 cash received plus gain recognized

For example:

Original Basis in Co. A: $5,000 (Price paid + W-2 income at vest)

FMV of 150 Co. B Shares: $6,000

Cash Received: $2,500

1. Total Consideration = $2,500 (Cash) + $6,000 (Stock) =$8,500
2. Realized Gain = $8,500 (Total) - $5,000 (Basis) =$3,500
3. Recognized Gain:  Lesser of $3,500 (Realized) or $2,500 (Cash) = lower is $2,500
4. New Basis (Co. B) = $5,000 (Old Basis) - $2,500 (Cash) + $2,500 (Gain) = $5,000

[william-orejudos]

@AmyC thank you. To add some additional details

- let's say that the 1000 shares in company A vested in March 2025 when the price was $3.00 per share, for a $3000 FMV at time of vesting.

- the acquisition and cash + stock exchange occurred in October 2025. This triggers the taxable event.

- The cost basis would be the $3000, from the time the company A shares vested. This is what gets reported in Box 14 of the W2.

- Once the acquistion by company B occurs, taking the option of a payout of $2.50 per company A share and 0.15 company B shares per company A share results in a $2500 payout + 150 company B shares

- lets say at the time of acquisition the company B shares are $15. So 150 shares = FMV of $2250
- so gross proceeds are $2500 + $2250 = $4750 ( despite the fact that proceeds reported on the 1099-B are $2500 only)
- captial gains are then $4750 - $3000 = $1750

is that correct?

[AmyC]

Realized gain vs recognized gain. Even though you received $2,500 in cash, you do not pay taxes on the full $2,500, just the $1,750. The remaining $750 is a non-taxable return of basis.

For the new stock basis: old basis $3,000 - cash received $2,500 + gain recognized $1,750 = $2,250.

When you enter this in TurboTax:

Proceeds $2,500

Cost basis $750

Result: correct $1,750 gain and correct basis in new shares. The short term gain from vesting in March until merge in October means you will be taxed as ordinary income rather than capital gains tax rate.

Well done!

[william-orejudos]

@AmyC can I also enter 3000 as the basis and 4750 as the proceeds? That would still come out to 1750 in gains. Or is it better to enter 750 as the basis and 2500 as the proceeds?

[AmyC]

Both ways end up with the correct gain so the 1099-B decides. Report what matches your 1099-B. Great question /catch.

[william-orejudos]

@AmyC ,

Great thanks for the clarification. One (hopefully final) question: if the merger date was Oct 27 but I did not receive the new shares until Nov 11, do I use the Oct 27 or Nov 11 stock price to calculate the value of the new shares?
I realize this is a bit off the track from what I previously asked!

[AmyC]

The merger date is used for tax purposes, October 27th wins. 

FMV:

• The IRS usually looks for the average of the high and low trading prices (or the closing price) on the Closing Date of the merger. Companies often use the Closing Price on the day before the merger or the day of the merger.
• Search "[Company B] Investor Relations Form 8937" online. It will give you the exact per-share value the company is reporting to the IRS. Using their number is the best way to ensure your return matches what the IRS expects to see.

Great questions throughout!

[william-orejudos]

@AmyC again thank you so much! One last clarification (I apologize if this has been answered) - I need to indicate somehow to turbo tax that the cost basis was not reported to the IRS (since it was left blank in the 1099-B) as opposed to being reported incorrectly. Will TT let me indicate this?

[AmyC]

When the basis is missing, it is considered non-covered. Select short term, non-covered and your Form 8949 will have box E marked. The program will let you enter the basis. Double check your return and the 8949 are correct before filing.

[william-orejudos]

@AmyC The assets that were sold were shares from my company that vested on March 31. Do you happen to know if the "date acquired" I should enter for these assets is the vesting date or the date of acquisition listed on the US Tax Form supplement of Apr 2? Does not make a difference as far as categorizing short term vs long term capital gains but I want to be as correct as possible.

[AmyC]

You should use March 31 (the vesting date) as your "Date Acquired."

Here is why:

• Vesting is the Taxable Event: On March 31, the shares became yours. This is the day the Fair Market Value (FMV) was determined for your W-2 income.
• Holding Period Begins: Your holding period for capital gains starts the day after the vesting date.
• The April 2 Date: The "acquisition date" of April 2 listed on your tax supplement is probably the settlement date (the date the transfer was finalized in the brokerage system) or the date the shares were actually deposited into your account.

Your paperwork trail supports the above. Keep all documents related to the original stock as it affects your current stock. 

You are quite welcome and glad I could help!

[william-orejudos]

@AmyC thank you again! About to hit submit on the file...one last thing to double check: from my new shares I received a dividend on Jan 2 2026 - I do not report this dividend income until I file my 2026 taxes next year, even though the "ex-dividend date" is Dec 11, 2025 - correct?

[william-orejudos]

@AmyC ah, ok, I found a more puzzling thing that I am trying to get clarity on - namely, what I should use as the cost basis for the shares acquired when Company B acquired company A. As I indicated before the share price of company B on day of acquisition was around $15. However I just found a year end document (the Plan Holdings document - NOT a tax document) that provided the following info:

Retained Share
Allocation Date: Oct 27 2025
Cost Basis 10.01

that would seem to imply that I should use 10.01 as the cost basis. How can this be? If this is the correct value to use then the cost basis of the shares I received is around $1500 rather than $2250 which changes the cost basis of the cash proceeds from around $750 to $1500 with lowers the capital gains of the cash proceeds from around $1750 to $1000.

It is almost as though they set the cost basis of the shares at a value that splits the original cost basis of $3000 in half. Or put another way, the original cost basis from the vesting of the Company A shares in March 2025 is being carried forward to the new shares. This is consistent with the observation that the company A shares vested at $2.74 per share, and the full exchange with the company B shares was 0.273. $2.74/0.273 = $10.01.

[AmyC]

It could be the substituted basis based on the type of reorganization. The tax code can allow you to defer gain on the stock portion. Instead of being taxed on the gain, you keep your old basis from Company A.

The Calculation Check:

• Company A Vesting Price: $2.74
• Exchange Ratio: 0.273
• Substituted Basis: $2.74 / 0.273 =$10.03. This slight difference to your $10.01$ is probably from rounding the fractional exchange ratio or transaction costs.

Since the basis is $10.01: More of your original "investment" ($3,000) is being attributed to the cash side of the deal. This increases the basis applied to the cash and decreases your immediate capital gains tax.

I am guessing you are looking at Form 8937 for the new company. It is form to use and keep with your documents.

I want to urge you to create a financial notebook that is kept separate from your tax return. Keep it safe and each year, add your year-end statements from all your financial accounts plus a copy of your W2’s, your  carryover information, and proof of your basis in your various investments. You must keep tax records  from the time you purchase until sold/ loss used plus 3 years. It is very easy to lose track of disallowed losses, carryforwards,  and basis. This can be a digital or paper notebook.