A reverse stock split reduces the number of shares and increases the share price proportionately. For example, if you own 10,000 shares of a company and it declares a one for ten reverse split, you will own a total of 1,000 shares after the split. A reverse stock split has no effect on the value of what shareholders own. Companies often split their stock when they believe the price of their stock is too low to attract investors to buy their stock. Some reverse stock splits cause small shareholders to be "cashed out" so that they no longer own the company’s shares, an example of which would be fractional shares.
When a stock split results in the shareholder owning a fractional share the company may distribute the value of that partial share to the shareowner in cash. The value of that partial share is compared to the cost basis of the same share portion to determine if there is a capital gain or a capital loss for tax purposes.
