Is my tax liability for a 1-to-1 stock exchange caused by a merger treated differently because the original stocks were a gift?

[jsklar]

I received a 1099-B for a 1-to-1 stock exchange that happened as a result of the Praxair/Linde merger last year. As far as I can tell from researching online, my tax liability is proceeds minus cost basis and that cost basis in this case is just the fair market value of the stocks at the time of the merger. Since there were no gains in the merger, I assume this works out to zero and therefore I have no tax liability -- does that sound right? 

However, the original Praxair stock was a gift from my father in law which makes me less sure that that is the correct way to address this. Does that situation do anything to change how this is handled?

[Zbucklyo · Accepted solution]

You are not correct.  This is a taxable transaction.  Your cost basis in the Praxair shares is whatever your father-in-law paid for them.  If the value of the Linde shares received ($163.45 per share) is greater than your cost basis, you have a capital gain equal to the difference between the value of the Linde shares received and your cost basis.  Your new Linde cost basis is equal to the value of the Linde shares received.  In other words, you have a recognized capital gain, but have a step-up in basis.

If your cost basis of the Praxair shares is greater than the value of the Linde shares received, you do not recognize a capital loss on the transaction.  Instead, your new cost basis for the Linde shares is equal to the old cost basis for the Praxair shares.  In other words, you don't have a step--down in basis.

[jsklar]

Thank you! I suspected something like this might be the case, but I wasn't sure about the particulars. This makes sense though. Thanks again!