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A corporate action is any material change to a security,
including name changes, stock splits, spin offs, and mergers, to
name just a few. In many cases, a corporate action will result in a
new position or a change to the cost basis of the security. Not surprisingly, it is
up to the investor to make all the necessary cost basis adjustments
for each security. With over 6,000 corporate actions annually that
affect a stock's cost basis, the odds are good that an investor will
encounter one sooner or later. Some corporate actions are
manageable; however other corporate actions require more laborious
calculations. Each corporate action type has its own rules that
investors must learn if they are to accurately complete
their Schedule D forms.
The arduous task of tracking and adjusting for corporate actions
can be further complicated by wash sale activity. GainsKeeper’s wash sale
algorithms are synchronized with corporate action activity to
alleviate this problem.
Some Types of Corporate Actions
Merger: A merger is a corporate action that results when
two companies join together to form one company. Mergers can be
taxable or non-taxable. If a merger is taxable an investor will need
to realize an "artificial" sale and re-purchase the security. For a
non-taxable merger an investor will need to allocate the cost basis
to the new security.
Spin Off: A spin off is a corporate action that occurs
when a company distributes part of its assets to form a new publicly
traded company. When a spin off occurs stockholders of the parent
company receive shares of the new company in the form of a stock
dividend.
Stock Split: A stock split is a corporate action that
occurs when a company changes the amount of shares it has
outstanding and then adjusts each share's price accordingly. The
number of shares received as a result of a stock split is a ratio of
the total shares owned right after the split. Stock splits are
usually non-taxable. It is important to note that after a stock
split the number of shares owned in the security and the cost basis
of those shares will change. Often stock splits are expressed as a
fraction. A two for one stock split, where the investor receives one
additional share for every share owned in the security, is the most
common type of stock split.
Example of a Corporate Action
How GainsKeeper
Treats Corporate Actions
GainsKeeper monitors all corporate actions for U.S.
equities and automatically adjusts each position. In many
cases, a corporate action will result in a new position and/or a
change to the cost basis of an existing position. Currently,
GainsKeeper tracks corporate actions from January 1, 1999 forward.
The process of rebuilding positions prior to 1999 is not a simple
operation. There are as many as 6,000 corporate actions that occur
each year. For questions on corporate actions prior to January 1,
1999 we suggest the investor contact the issuer directly. Many
companies provide extensive information on their web sites within
their investor relations' section.
GainsKeeper processes
corporate actions that affect cost basis or capital gains
tax for the Schedule D. We do
not process cash distributions, such as interest income, cash
dividends or capital gain distributions. Brokerage and mutual
fund firms have an obligation to supply this information to
investors. And, not all users choose to reinvest their dividends and
capital gains distributions. If you do reinvest your dividends,
please record them by using the DivRe action type within the Record
Stock or Record Mutual Funds choices in GainsKeeper.
GainsKeeper uses security market values on corporate
action effective date (i.e. ex date for spin offs) to allocate cost
to new securities and to calculate gain/loss for taxable events.
This is an industry standard and audit accepted practice used to
arrive at accurate and consistent calculations. Nevertheless,
different organizations may use varying approaches. It is possible
that an investor may receive a slightly different calculation if the
company mails the corporate action cost information. IRS guidelines
dictate that cost should be allocated based on fair market value on
distribution date. GainsKeeper has developed a proactive approach so
that investors can see their cost and gain/loss positions, as well
as work with their new securities without having to wait for a
mailing to arrive from the company long after they need the
information.
GainsKeeper automatically processes corporate action
adjustments in users’ portfolio. If a stock split occurred, the
share amount will increase, the overall cost will remain the same,
and the per share cost will change. If a merger occurred, users will
no longer see the security that was acquired in their account; they
will see the new security. GainsKeeper will show users the corporate
action in their symbol history. Users can view this history from
GainsTracker / Symbol Details. By using this feature investors can
view all of their transactions that have occurred in this particular
symbol, such as buys, sells, corporate actions and wash sales
adjustments.
GainsKeeper processes most actions the night
before in a nightly batch so that users can see their new updated
positions on the morning of ex-date (the date the action is
effective). Mergers and spin offs are an exception to this rule. The
GainsKeeper operations team uses market values on distribution date
(effective date) to properly account for cost and gain/loss
calculations. Therefore, GainsKeeper will process mergers and spin
offs after the market closes on distribution date. GainsKeeper will
run an additional batch to process these actions, and users will be
able to see the results on the evening of distribution date.
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