From reading the Form 8937 posted after the IBM to Kyndryl spin-off, I am required to calculate the adjusted cost basis of each lot of IBM stock issued to me. I started to receive shares in the 1960's and with dividend reinvestment, stock splits, etc. this would result in about 560 separate calculations. I have kept careful records of my cost basis for every transaction and stock split, but it sounds like I cannot use my accumulated cost basis and apply the percentages given in the Form 8937 for a single calculation of the new cost basis. Since this is supposed to be a zero sum tax event and the total adjusted cost basis for the IBM and new Kyndryl stock will equal my previous IBM cost basis, would the IRS accept me leaving my current IBM cost basis as is and applying $0 to the new Kyndryl stock? Or are there other suggestions to avoid trying to complete 560 IBM and Kyndryl cost basis calculations? Thank you.
One possible approach is to utilize the New York Stock Exchange closing price on November 4, 2021 (the first trading day immediately after the Distribution), for IBM common stock ($120.85 per share) and for Kyndryl common stock ($26.38 per share) as the fair market value. At a distribution rate of 1:5, the weighted value of the distribution would be $5.28 ($26.38 / 5) worth of Kyndryl stock for every share of IBM stock. Therefore, you would allocate 4.18% ($5.28 / ($120.85 + $5.28)) of your tax basis in your IBM shares immediately prior to the Distribution to the Kyndryl shares received in the distribution and allocate 95.82% ($120.85 / ($120.85 + $5.28)) of your tax basis to your IBM shares. As this is just one of many approaches, you should consult with your own tax advisor to assess appropriate methodologies in this regard.
this means 4.18% of the cost of each purchase of IBM would be allocated to KD
if all the shares of both stocks were sold at the same time it probably wouldn't matter that cost was not allocated unless the shares are held by a broker which may do a cost allocation but only for the share it held. Whether a DRIP would do this is unknown.
however, if sold at different times there would certainly be a tax issue. if you sold IBM but not KD, the IRS could argue you have understated your income because you overstated the IBM cost. if so you may get hit with penalties interest and the additional taxes.
if you never sell either then it's not going to matter because your heirs would get the stocks based on FMV on the date of death.
if you sold KD say year 1 and IBM year 5 and the IRS caught the cost issue in year 5, they could increase your taxable gain in year 5 but since year 1 is beyond the statute of limitations they could not reflect the allocated cost to KD in year 1. thus any benefit to a higher cost than reported for KD would be permanently lost.
a spreadsheet would help in doing the calculations and you don't need to pay MS. if you don't have a spreadsheet program there are free versions of programs like Excel available.
One possible approach is to utilize the New York Stock Exchange closing price on November 4, 2021 (the first trading day immediately after the Distribution), for IBM common stock ($120.85 per share) and for Kyndryl common stock ($26.38 per share) as the fair market value. At a distribution rate of 1:5, the weighted value of the distribution would be $5.28 ($26.38 / 5) worth of Kyndryl stock for every share of IBM stock. Therefore, you would allocate 4.18% ($5.28 / ($120.85 + $5.28)) of your tax basis in your IBM shares immediately prior to the Distribution to the Kyndryl shares received in the distribution and allocate 95.82% ($120.85 / ($120.85 + $5.28)) of your tax basis to your IBM shares. As this is just one of many approaches, you should consult with your own tax advisor to assess appropriate methodologies in this regard.
this means 4.18% of the cost of each purchase of IBM would be allocated to KD
if all the shares of both stocks were sold at the same time it probably wouldn't matter that cost was not allocated unless the shares are held by a broker which may do a cost allocation but only for the share it held. Whether a DRIP would do this is unknown.
however, if sold at different times there would certainly be a tax issue. if you sold IBM but not KD, the IRS could argue you have understated your income because you overstated the IBM cost. if so you may get hit with penalties interest and the additional taxes.
if you never sell either then it's not going to matter because your heirs would get the stocks based on FMV on the date of death.
if you sold KD say year 1 and IBM year 5 and the IRS caught the cost issue in year 5, they could increase your taxable gain in year 5 but since year 1 is beyond the statute of limitations they could not reflect the allocated cost to KD in year 1. thus any benefit to a higher cost than reported for KD would be permanently lost.
a spreadsheet would help in doing the calculations and you don't need to pay MS. if you don't have a spreadsheet program there are free versions of programs like Excel available.
When you sell shares, the proportional calculation applies to every lot and every reinvested dividend that is disposed of. shares are sold First In, First Out.
Since you said you have careful records over all time, I don't see why you should have any problem.
the proportion factor is not going to change in the future.
Future reinvested dividends or shares purchased will not be affected.
If you plan to never sell, this is all moot, unless Congress eliminates the step up basis for heirs, which is something they want to do.
Unfortunately, you really should do a spreadsheet with the calculation described by @Mike9241 (based on the Form 8937 - without the rounding used in the form).
Both IBM and Kyndryl can and may have future stock splits and spin-offs, mergers, and who knows what...all of which will affect the cost basis of future adjusted lots. NOT adjusting things now, is just looking for a headache down the road.
You "could" claim $0 for the Kyndryl on a sale... since that would result in MORE tax to the IRS. You cannot claim $0 if you gift any shares to a person while you live, as they must receive your actual cost basis. (You CAN claim anything you want as the basis [in principal - it is reported on a tax form though] if you gift to charity since the value on the date of gift is the charitable deduction regardless of cost basis.)
Similarly, you "could" claim the full basis of IBM on those lots still...but if you sold any IBM (or gifted it to a person and they sold it) - the IRS in an audit will find that you did not report a sufficient long term capital gain and will penalize you for that error.
"Zero sum tax events" from spin-offs etc do not mean that cost basis is not affected... it just means that there is no reportable income or gain (unless there is a tiny amount of cash received in lieu of fractional shares).
An advantage to holding your equities in a brokerage account is that the brokerage itself will compute all of this for you and your cost basis will always be up to date.
"the brokerage itself will compute all of this for you "
Not if you started buying IBM in the '60s.
If you sell the LT first-in reinvested dividends (and/or purchases), you can aggregate the cost and gain on one line with Date Acquired "Various". Adjust basis further for the spin-off. That's one Kyndryl-related calculation.
@fanfare wrote:
"the brokerage itself will compute all of this for you "
Not if you started buying IBM in the '60s.
Yes, of course they can... as they've done that for me for years... since when I opened the account, I provided them with all of my cost basis information for the basis lots purchased in the 60's. There is no rocket science here.
The OP said he/she kept immaculate records. If, on the other hand, you have no records, then that's another story.
Thanks for all the responses to my Kyndryl spin off question. Since I do have all the IBM stock purchases, dividend reinvestment, splits, etc. in an Excel spreadsheet I am using the calculations from Mike9241's response to adjust the IBM cost basis and calculate the Kyndryl cost basis for each lot purchased.
I got rid of Kyndryl about a week after the split.
I'm not sure if I've figured the Cost Basis for the Kyndryl shares split off from IBM pre-2011 (non-covered).
I created a spreadsheet for IBM share purchase date, Kyndryl shares purchased, Cost basis from adjusted IBM share value for the date. For each IBM share listed I calculated:
total cost basis = Kyndryl shares * adjusted IBM share value
cost basis as split = total cost basis * .2
Was this the correct way to do it?
Kyndryl says one possible method is to divide the cost basis 4.18%/95.82%.
One possible approach is to utilize the New York Stock Exchange closing price on November 4, 2021 (the first trading day immediately after the Distribution), for IBM common stock ($120.85 per share) and for Kyndryl common stock ($26.38 per share) as the fair market value.
At a distribution rate of 1:5, the weighted value of the distribution would be $5.28 ($26.38 / 5) worth of Kyndryl stock for every share of IBM stock. Therefore, you would allocate 4.18% ($5.28 / ($120.85 + $5.28)) of your tax basis in your IBM shares immediately prior to the Distribution to the Kyndryl shares received in the distribution and allocate 95.82% ($120.85 / ($120.85 + $5.28)) of your tax basis to your IBM shares.
See Tax Basis FAQ
How do I enter $16.47 partial share from IBM/Kyndrl. Is there a form I should get from someone?
On or about the time of the Kyndryl spin-off from IBM, Investor Relations at Kyndryl issued the below statement explaining how IBM shareholders could determine their basis in IBM shares. There will likely be no form that you will receive explaining to you the basis of your IBM shares.
"One possible approach is to utilize the New York Stock Exchange closing price on November 4, 2021 (the first trading day immediately after the Distribution), for IBM common stock ($120.85 per share) and for Kyndryl common stock ($26.38 per share) as the fair market value. At a distribution rate of 1:5, the weighted value of the distribution would be $5.28 ($26.38 / 5) worth of Kyndryl stock for every share of IBM stock. Therefore, you would allocate 4.18% ($5.28 / ($120.85 + $5.28)) of your tax basis in your IBM shares immediately prior to the Distribution to the Kyndryl shares received in the distribution and allocate 95.82% ($120.85 / ($120.85 + $5.28)) of your tax basis to your IBM shares. As this is just one of many approaches, you should consult with your own tax advisor to assess appropriate methodologies in this regard."
Because you received a partial share, and based on the above example, you could substitute the value of your partial share ($16.47) for the Kyndryl share price of $26.38, which is the share price (for one full share) of Kyndryl in the above example.
Below is the link to the Kyndryl Investor Relations spin-off information which you might find helpful.
I have shares of IBM that I purchased years ago through the Employee Stock Purchase Plan (ESPP) at a 15% discount. The last time I sold some IBM shares back in 2007, I understood the "basis" of the stock to be my actual cost of the shares PLUS the 15% discount added back in. Thus the capital gain would be the price I sold it at MINUS commission MINUS (actual cost + the 15% discount). And I would have to add that 15% back as Ordinary Income on my tax return. This method is described in a Turbotax article (search for: turbotax espp)
Now with regards to the Kyndryl spin off, to compute the basis of the Kyndryl stock, I would multiply the IBM basis X 4.18% as mentioned above.
The question I have is what should I use as the IBM basis in this calculation... The actual cost. Or the actual cost PLUS my 15% discount?
I also have a Kyndryl spin-off question. I received $15.38 as CASH IN LIEU OF FRACTIONAL SHARES (KD). The fractional share =0.7636. TD Ameritrade website says that my cost basis for the whole shares I got was $3.80/share. I imported my 1099-DIV/B to Turbotax and it needs me to fill in the cost basis for my $15.38 (0.7636 share). What do I enter? Is the cost basis $0? Because I did not buy it? Is the cost basis $3.80 x 0.7636 = $2.90?
OR, I see this on the TD site under "Realized Gain" for Kyndryl:
| Totals: | Adj cost 0.00 | Adj proceeds 15.38 | Adj gain ($) | 15.38 | Adj gain (%) | 0.00 |
Does "Adj cost 0.00" mean my cost basis is zero?
Thank you.
Your cost basis is $2.90 ($3.80 x 0.76360). You received cash in lieu because IBM gave you whole shares of Kyndryl as part of the spinoff but didn't give you fractional shares. Those were paid out in cash to make things simple for everyone.
For more information on calculating your basis see Tax Basis FAQ
I'm in the same boat as Gaypana - we got $8.18 cash in lieu for .4 shares of Kyndryl. If my original cost basis for IBM shares was let's say $28, I'm confused as to why my cost for those .4 shares is .4 * $28. Wouldn't the cost basis be .4 * whatever I calculated my Kyndryl cost basis to be per share using the calculations in form 8937 as the original poster talked about?
And then does this count as a long or short term transaction if I got the original IBM shares back in like 2009?
Thanks for helping to clear up my confusion!
If you paid $28 originally that was your cost basis. Then you will have to create your adjusted cost basis after the split. And that is what you would multiply times .4.
Anything older than a year and a day is long term.
Thanks @RobertB4444 for taking the time to reply. Forgive me if I'm just not getting it, but when you say create my adjusted cost basis after the split, are you confirming my thought that I need to calculate my cost basis for the IBM and Kyndryl shares, and then multiply the Kyndryl cost basis by .4?
So to put it in concrete terms, original cost basis of those IBM shares for me was $28. Applying the calculations from that form 8937, we allocate 95.8% of the cost basis to the IBM shares and 4.2% of the cost basis to the Kyndryl shares. So total cost basis of the 227 IBM shares is $6356. As part of the spinoff, I get 45 shares of Kyndryl, which means that cost basis is 4.2% of the fair market value, approximately $263.63. So that makes the Kyndryl per share cost basis be $263.63/45, or $5.86? And then I multiply 5.86 by .4 to get a cost basis of the fractional Kyndryl share of $2.34? And that means that the $8.18 that I got as cash in lieu represents a capital gain of $5.84? And that's a long term capital gain because I originally received the IBM shares more than a year and a day ago?
And then even more confusion:
If I use an online calculator at https://www.costbasistools.com/spinoff/calculator.php and enter the following values:
Line 4: Purchase date of original stock: 12/1/2009
Line 8: Number of shares of original stock: 227
Line 9: Total cost of original shares: 6356 (227 shares * $28/share)
Line 10: Cash in Lieu received: $8.18
Line 11: Tax Status: 2 (taxable)
Line 12: Market value of share received on date of distribution: $26.38 (from form 8937, closing price of Kyndryl on 11/4/2021)
That form calculates cost basis of the fractional .4 share at $10.55, which means that the $8.18 represents a loss of $2.37. So it seems like that calculator is somehow saying the cost basis of the share is based on the market value at the time of distribution, not the 2009 value of 4.18% of my original IBM shares?
You sound like an IBM lifer like my dad was. I just went through all of those old papers (including stock distributions reported on punch cards - seems like they used those for everything). I was looking for an answer to the Kyndryl question and found this thread. I don't have an answer, but just thought I'd say hi.