When a publicly traded company conducts a reverse stock split, it consolidates the number of outstanding shares. For example, a 1-for-2 reverse split means you'll get one stock, valued twice as much as the before-split stock, for every two you own. This reverse split can result in a fractional share, such as 1 share turning into half a share. You can't own a portion of a share, so this fractional share is bought back by the issuing company at the fair market price. You have to calculate the cost basis for this fractional share to determine gain or loss in the sale.
1. Multiply the number of shares you originally purchased by the purchase price per share. For example, If you bought 201 shares of a stock for $10, then your total purchase price is $2,010.
2. Add any commissions paid when purchasing the stock. If you incurred a $50 broker commission, for example, your total cost basis would be $2,060.
3. Divide the total cost basis by the number of shares to calculate the average cost basis per share, before the split. Continuing with the example from the previous steps, this results in a cost basis of $10.25 per share.
4. Divide the cost basis times the allocation ratio to calculate the average cost basis per share after the split. In the example, a 1-for-2 split offers a 1/2 ratio, or 0.5. Dividing $10.25 by 0.5 gives you an average cost basis of $20.50 after the split.
5. Multiply the number of shares by the allocation ratio to calculate the number of shares you now own. In the example, multiplying 201 times 0.5 gives you 100.5 shares, which means you have 100 full shares and one half share.
6. Multiply the share fraction times the cost basis per share to determine the cost basis for the fractional share. In the example. 0.5 times $20.50 gives you a cost basis of $10.25 for the fractional share. If you are paid more than that amount from the fractional share, you have a capital gain. If you are paid less than that, you have a capital loss.