How to handle stock merger - VMware & Broadcom (edit)
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"Basis of the AVGO 13.104 shs is the original basis of all, plus the reported gain."
So basis of avgo is 6840/13.1 = 522 + ? what is the original amount?
I would report whatever the 1099-b shows, not what the broker activity statement says. But I am not sure if that form will show the proceeds of disposition of the vmshare and their cost basis. Likewise, the avgo shares received will show an unrealized cost basis until sold.
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Your overview helped me understand your "each lot is different" meaning. What you are really saying is each person's overall situation (specific values) will vary specific to the exact number of VWM shares they held in any one account. No disagreement there.
@BradS wrote (Emphasis added as discussion points)
Using the standard stock plus boot, you sold the whole thing for $1946.67. If that's less than your basis (doubt it), I said earlier that there is no gain or loss, and remaining basis of the 1.26 shs— is lowered by the cash you received, or $712.50.) If you had a gain selling at $1,946.67, it's reportable, up to the cash you got, or $712.50. Basis of the AVGO 1.26 shs is the original basis of all, plus the reported gain.
I take a different tack on that standard which I originally laid out on page 1 of this discussion on November 25. That methodology is to sell all the shares at a price that yields the right taxable gain. So if you bought a lot for below a certain lower price point, you sell that lot for it's basis plus the cash received. If your lot basis above a high price point, you sell for your basis, such that there is no gain (nor loss). For the 50/50 splits such as this 10 share example, the two price points are 123.42 and 194.67.
- Basis below 123.42: Sell shares for basis + cash received. Realized gain = cash received = $71.25 / per share sold
- Basis between 123.42 and 194.67: Sell for 194.67. Realized gain = less than cash received, between $71.25 and $0 per share sold
- Basis above 194.67: Sell shares for basis. Realized gain = $0
For the non-50/50 cases, the two price points are somewhat higher but the basics are the same. From there you BUY the right amount of AVGO shares for the gross proceeds of the sale less the cash that is to remain in your account. That means:
- If your original basis in VMW shares was less than that low end price point, all the cash is current realized capital gains, and the basis in the new AVGO shares is your original basis of your VMW shares. Sale proceeds were was old basis + cash. New basis = proceeds less cash. Therefore, New basis = old basis.
- If your original basis was between the two price points, only some of the cash is current realized capital gains, and your basis in the new AVGO shares is your proceeds of the sale less the cash received. Your basis in AVGO is reduced from your basis in the VMW shares. The rationalization is that while part of the cash received was capital gains, the other part was a Return of Capital reducing the basis.
- If your original basis was above the top price point, then no capital gains were incurred. The basis in the AVGO holding is your prior basis in VMW less all the cash you received. Effectively the cash received is all 'return of capital reducing your basis.
So three case variations for your 10 shares of VMW
- Basis = $100 / share = $1,000 basis
- Received $712.50 cash + 1.26 shares AVGO
- In Quicken
- Sell 10 shares VMW for $1,712.50; realized gain = $712.50
- Buy 1.26 shares AVGO for $1,000 (basis = $793.65/share)
- Sell 0.26 shares AVGO at $981.20/share for $255.11 and a realized gain of (981.20-793.65)*0.26 = 48.76.
- Basis = $150 / share = $1,500 basis
- Received $712.50 cash + 1.26 shares AVGO
- In Quicken
- Sell 10 shares VMW for $1,946.70; realized gain = $446.70
- Buy 1.26 shares AVGO for $1,946.67 - 712.50 = 1234.17 (basis = $979.50/share — not a coincidence)
- Sell 0.26 shares AVGO at $981.20/share for $255.11 and a realized gain of (981.20-979.50)*0.26 = 0.44.
- Basis = $200 / share = $2,000 basis
- Received $712.50 cash + 1.26 shares AVGO
- In Quicken
- Sell 10 shares VMW for $2,000; realized gain = $0
- Buy 1.26 shares AVGO for $2,000-712.50 = 1,287.50 (basis = $1,021.83/share)
- Sell 0.26 shares AVGO at $981.20/share for $255.11 and a realized gain of (981.20-1021.83)*0.26 = -10.56 (a reportable capital loss).
And yes, those two price points do change if dealing with 100 shares instead of 10 shares (or with 99, or 101, or 1,234 etc.)
For what it's worth, I have been using this model for cash-to-boot transactions for over 15 such transactions over the last 8+ year and I have found it quite reliable for my needs (accurate cap gains and accurate basis forward). Obviously, this case (if applicable, here) is complicated by the rounding twist.
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@questionsforever : The original basis is whatever your basis for each VMW lot was, which for most is whatever they paid for it. (For me it's two steps uglier — I BOT DVMT stock which got converted to DELL stock plus a fraction, later DELL spun off VMW and split the basis. I also would not bother about the PPS until the final number: add your basis plus the reported gain (anywhere from 0 to the cash received), then if you want the PPS (guess you need it for the basis of the fraction), then you divide by the number of AVGO shares received.
@q_lurker : Guessing you're just talking about how to fake it in quicken. Remember, you can't then import anything to a tax program from there because for now, it would have to match the 1099B which would probably report the cash received; you then report a basis of anything from 0 to that amount of cash, to match the reportable gain. Also note that you have now assigned a new acquisition date of the date of the transaction, whereas your AVGO stock should date back to the date you bought the original stock (be it DVMT, DELL or VMW).
Note that that is for a proper stock+boot deal. With this one it makes so little sense — you split the shares into those selling for cash (rounded), and those converting to AVGO, but then you treat them as one item in reporting, back to the stock+boot deal. That plus brokers on their own or with customers input, chose which shares to sell versus convert, presumably depending on whether they wanted to maximize or minimize the current gain. (I was lucky that didn't apply to me as I had just one lot.)
I'm still shouting in my head that not only does their share allocation make no sense, but it makes even less than sense (does that make it negative sense?) that they do that but go back to the traditional method of calculating the gain. Plus, ignoring the "each lot separately" that is done in that traditional method. Remember, when someone chooses the lots, then they can have one lot sold 100% for cash and others converted 100% to AVGO. That traditional method has all lots treated the same (same formula) but each lot calculated differently but can be the same formula (utilizing if functions to come up with either zero gain, 100% of boot gain, or if between those two, the actual gain).
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The cost basis of the avgo shares received is correlated with the realized capital gain claimed on the merger right? So you can't select a different basis and realized gain, they go together? I.e. if my realized gain is the cash received, then my basis in avgo will be quite high, almost equal to the fmv in my case.
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@BradS said
Using the standard stock plus boot, you sold the whole thing for $1946.67.
I’m saying that may not be correct in all cases.
@BradS said
Basis of the AVGO 13.104 shs is the original basis of all, plus the reported gain.
I’m saying that also is not correct and determining the basis of the new holding is also case dependent.
Readers can make their own decisions and should do their own due diligence. My primary purpose in these exercises is to have a double-check on brokerage information.
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