How to Calculate Your New Vodafone (VOD) Cost Basis

If you were holding VOD shares before the VZ buyout of their 45% stake of Verizon Wireless, you might notice an unrealized capital loss now.  This is due to the 6/11 reverse split that was received.

I’ll show you how my new cost basis was calculated and you should be able to do the same for your shares to figure out your new cost basis.

On 11/07/12 I originally purchased 100 shares of VOD for a total of $2705.85 ($26.969/share + $8.95 commission).

Multiply your original purchase by 6/11 to get the new amount of shares

Per the recent buyout agreement, those 100 shares turned into 100 x 6/11 = 54.545454…  shares on 02/24/14.

The fractional share portion of .545454.. was paid as cash in lieu of $22.28 or $40.85/share that I received on 02/28/14.

Divide your original cost basis by your new amount of shares

My cost basis per share after the reverse split but before the cash in lieu payment was $2705.85/54.545454 shares or $49.607/share.

Find your cash in lieu cost basis for the fractional shares 

So the .5454.. shares should reduce my cost basis by $49.607 x .545454 = $27.06.

Subtract to get your new original cost basis

So now my original cost basis is $2705.85 – $27.06 = $2678.79.  I verified this is exactly what is now listed on my Schwab brokerage page.

Calculate your new per share cost basis

My per share cost basis is now $2678.79/54 shares = $49.61/share.  This now shows up as an unrealized capital loss which is ok by me.  I don’t plan on selling shares anytime soon, but if I did, I would get to write off this loss.

Tax Treatment

As for tax treatment of the cash in lieu and the cash payment , I asked Charles Schwab:

“The guidance we have been given is clients that received cash and VZ dividends will be taxed as cash with a basis of $0.00.”

The rep said this hasn’t been fully verified by VOD yet though.

That is not good news about the dividend payments if that is true.  This means it would probably get reported on a 1099 form and be fully taxable.

There was an article from Barron’s last year that said these payments would be qualified dividends but I have to think my broker has a better understanding.  I guess I’ll soon find out.  I know I’m not thrilled about paying regular taxes on these distributions.

Comments

  1. says

    Yes, in Germany the new Verzizon shares are also completely taxable!
    But I wanted to witness once how a transaction takes place.
    But next time (eg I have shares from Lorillard and Reynolds will buy Lorillard), I will completely sell the shares from LO before the transaction!

    Best regards
    D-S

    • says

      Hi D-S,

      I’m not looking forward to paying taxes on this income. The merger created sort of a mess. You may be right, it might be easier to sell before something like this happens and then buy back afterwards. It will certainly be a learning experience.

      Thanks for stopping by!

  2. says

    Brent,

    Interesting stuff. I noticed the cost basis change on my VOD shares which shows a capital loss. I thought that was wrong at first, but found it was correct after looking into it a bit more.

    The cash payment from VOD as Return of Value shows as a dividend on my brokerage statement, so I assumed it was taxed at 15%. I’ll have to research this. If it’s taxed at ordinary income that would really suck, and be a bit unusual.

    Let me know if you find out more!

    Best wishes.

    • says

      Hi DM,

      I initially assumed also that the distributions were going to be taxed as dividends. When I get full clarification I’ll make sure to let you know. This is a learning experience for sure and may change my behavior next time when a merger like this is eminent.

      Thanks for stopping by.

  3. Anonymous says

    how can you have a cost basis for the new VOD shares above where it has ever traded? that is counterintuitive. Additionally, as a portfolio manager, my clients now show a loss which hurts their performance when they actually had a gain over 60%

    • says

      Hi Anonymous,

      First, I’m happy about an unrealized capital loss. Since I plan to hold shares for the long-term, I want to pay the last amount of tax as possible. I can understand the confusion.

      The reverse split and change in the number of shares outstanding, caused this cost basis to happen. Basically the gains were paid out in the form of VZ stock and a distribution that will be taxable. The “unrealized loss” just balances out these distributions. The net result was neutral.

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