Spin-Off Cost Basis Calculator

What a Spin-Off Does to Your Cost Basis

A spin-off happens when a parent company separates a division into its own publicly traded company. Shareholders keep their parent shares and receive new shares in the spun-off business, usually at no cash cost. The tax question is what happens to the cost basis you already had in the parent stock. The original basis does not vanish, and it does not copy to both holdings. It gets divided.

The IRS Publication 550 chapter on sales and trades of investment property explains that a spin-off meeting the tax code reorganization rules is a nontaxable trade. No gain or loss is recognized on the day the new shares arrive. Instead, the basis of the original parent shares is split between the parent stock you still hold and the new spin-off stock, and the split has to follow a specific method.

The split matters because basis is what the IRS subtracts from your sale price years later to compute gain or loss. A wrong number changes the tax bill on every future sale of either holding.

The IRS Allocation Formula

The allocation rule lives in the Treasury regulations at 26 CFR 1.358-2, which covers basis in exchanges and distributions under Sections 354 and 355 of the tax code. The regulation says the basis of each original share is allocated between the parent stock and the spin-off stock received in proportion to their fair market values. Publication 550 carries the same rule in its discussion of corporate reorganizations.

The arithmetic has four steps: multiply each company's shares by its fair market value per share, add the two market values, divide each by the total for its percentage, and multiply your original basis by each percentage.

Example 1: an original basis of 10,000 dollars, 100 parent shares at 80 dollars, and 50 spin-off shares at 40 dollars. Parent market value is 100 x 80 = 8,000 dollars. Spin-off market value is 50 x 40 = 2,000 dollars. The total is 8,000 + 2,000 = 10,000 dollars. Parent percent is 8,000 / 10,000 = 0.8, or 80 percent, and spin-off percent is 2,000 / 10,000 = 0.2, or 20 percent. Parent basis is 10,000 x 0.80 = 8,000 dollars and spin-off basis is 10,000 x 0.20 = 2,000 dollars. Per share, that is 8,000 / 100 = 80 dollars for the parent and 2,000 / 50 = 40 dollars for the spin-off.

Where the Fair Market Values Come From

The fair market value that the regulation asks for is the trading price of each stock on the distribution date, usually the first day the spin-off shares trade on their own, sometimes called the when-issued date or the ex-distribution date. Companies and tax data services publish both prices, and the corporate action notice generally names the exact date.

Publication 550 defines fair market value as the price at which property would change hands between a buyer and seller, neither forced and both informed. Opening prices on the distribution date are the accepted proxy.

The IRS instructions for Form 1099-B add a reporting rule: an issuer that takes an organizational action affecting basis must file an issuer return on Form 8937, or post it on its public website for 10 years. That filing states the allocation percentage and the valuation date the company used, which removes the guesswork about which prices to pull.

Because the two percentages always sum to 100 percent, checking your math is easy. If parent percent is 80 percent, spin-off percent must be 20 percent. If the two do not add up, one of the market values or the basis figure was entered wrong.

A Second Worked Example With Unequal Values

Unequal splits work the same way. Example 2 uses an original basis of 7,500 dollars, 200 parent shares at 45 dollars, and 30 spin-off shares at 25 dollars.

Parent market value is 200 x 45 = 9,000 dollars. Spin-off market value is 30 x 25 = 750 dollars. The combined total is 9,000 + 750 = 9,750 dollars. Parent percent is 9,000 / 9,750 = 0.9231, which is 92.31 percent. Spin-off percent is 750 / 9,750 = 0.0769, or 7.69 percent, and 92.31 + 7.69 = 100.

Parent basis is 7,500 x 0.9231 = 6,923.08 dollars. Spin-off basis is 7,500 x 0.0769 = 576.92 dollars. The two add back to 7,500 dollars, which confirms the split. Per share, parent basis is 6,923.08 / 200 = 34.62 dollars and spin-off basis is 576.92 / 30 = 19.23 dollars.

The per-share figures matter when you sell part of a position. Gain or loss on each lot is the sale price minus the per-share basis times the shares sold. Rounding cents per share is normal; the totals should tie back to the original basis.

The Publication 550 Spin-Off Example

Publication 550 runs its own example that shows the paperwork path most investors follow. In the 2025 edition, on July 18, 2025, RGB Corporation divests itself of SFH Corporation. You hold 75 shares of RGB stock with a basis of 5,400 dollars and receive 25 shares of SFH stock in the spin-off. No gain or loss is recognized. The company reports that your SFH basis equals 10.9624 percent of your RGB basis. Your SFH basis is 0.109624 x 5,400 = 591.97, which the publication rounds to 592 dollars. Your RGB basis after the spin-off is 5,400 - 592 = 4,808 dollars.

Two details carry over to every spin-off. First, the company hands you the percentage, so you do not have to compute it when the Form 8937 states it. Second, the two new basis figures must sum to the original 5,400 dollars, and they do: 4,808 + 592 = 5,400.

Publication 550 also states the per-share rule you may need later: in the same example, dividing 4,808 / 75 gives 64.11 dollars of RGB basis per share, and 592 / 25 gives 23.68 dollars of SFH basis per share.

Taxable and Non-Taxable Spin-Offs

Not every spin-off is tax free. The Section 355 rules require the distribution to meet conditions on control, business purpose, and continuity. When they are met, the method above applies and no tax is due at distribution. When they are not, the spin-off is taxable and the math changes.

In a taxable distribution, Publication 550 states that your basis in stock received is its fair market value on the date it is distributed, and the basis of your original stock does not change. The value of the new shares is also treated as dividend income to the extent of the company's earnings and profits.

The holding-period rule matters for the capital gains rate. Publication 550 states that stock acquired in a spin-off takes on the holding period of the old stock, so shares held more than one year keep long-term treatment in the new company.

A partial case: if you receive cash along with stock in an otherwise nontaxable spin-off, Publication 550 says gain is recognized up to the cash amount, and the basis of the stock received drops by that cash. This often comes up with cash in lieu of fractional shares.

Form 8937, Form 1099-B, and Recordkeeping

Three documents do the recordkeeping work. The first is Form 8937, Report of Organizational Actions Affecting Basis of Securities. The issuing company files it or posts it on its investor relations site within 45 days of the action, per the Form 1099-B instructions. It states the allocation percentage, the valuation date, and sometimes a per-share worksheet.

The second is your broker's cost basis display and the Form 1099-B that reports each sale. Brokers of covered securities have been required to track basis since 2011, and corporate actions flow into their numbers automatically. That does not make them right for your tax return. Comparing the broker figure against Form 8937 catches errors while they are still easy to fix.

The third is your purchase confirmation for the original shares, which proves the starting basis. Publication 550 advises keeping the notice until the statute of limitations runs out on the year you finally sell the stock, generally three years.

The IRS directs taxpayers to the About Publication 550 page and the Form 8937 instructions for the current rules. This page follows the 2025 edition of the publication, dated March 2026.

Common Basis Mistakes and Edge Cases

The first mistake is treating the spin-off as a sale and reporting a gain or loss at distribution. Publication 550 places qualifying spin-offs under the nontaxable corporate reorganization rules, so there is nothing to report until a sale happens.

The second is splitting basis 50/50 out of habit. The split follows market values, not share counts. In Example 2 above, the parent holds 200 shares against the spin-off's 30, yet the parent only receives 92.31 percent of the basis because the spin-off shares are worth more per share than a raw head count suggests.

The third is using the wrong date's prices. Announcement, record, and ex-dividend dates all give wrong percentages. The regulation ties the allocation to the fair market values at the time of the distribution, which companies implement as the distribution date.

The fourth is ignoring fractional-share cash. When a broker sells fractional shares, that payment is a taxable event on its own and reduces the basis of the lot it came from.

Finally, remember this page is education, not tax advice. Spin-off tax treatment depends on the specific transaction, and the company's Form 8937 controls the official allocation. Confirm the numbers with a tax professional before filing.