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: Original Cost/New Share Count = $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: Original Cost – Cash In Lieu Payment =$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.
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
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!
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.
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.
IRS has ruled ADR capitol returns are ordinary dividend for US tax payers and not qualified dividend. And taxed as ordinary income plus AMT tax if AGI ajusted gross income exceeds threshold. Definitely not a good deal
WU
WU,
Thanks for that information. I had a feeling that would be the case. That’s unfortunate for a lot of us then.
Take care!
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%
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.
Wrong the result is not neutral. Shareholders got good and screwed. Dividends are income. Get taxed. Capital losses cannot cancel can only be taken against capital gains or $3000 of ordinary. Income a year. Many victimized shareholders will be paying big taxes on money that was not income, but a mere return of part of their original investment. The companies did this probably because it looked better for them on their books. You are naive. They thru us under the bus. Wake up.
It’s now 2018 and I’m calculating my VOD basis after years of reinvesting and I wanted to see if you stood by your 4/3/14 answer to Anonymous. My VOD basis just prior to the VZ spinoff was 32K for 1100 sh. I received 600 VOD, 307 VZ, and 6K cash. My 1099DIV was 21K–exactly the value of the VZ shares and the cash. If I apply the original 32K VOD basis against the new 600sh, the avg cost/sh is way above where it’s ever traded–an unrealized loss as you indicated. Are you sure that you don’t subtract the 21k distribution from the original basis. It would be very nice but it’s counter intuitive as you said. Thanks.
The proceeds showed up as a unexpected dividend on my 1099.
In regards to, “My per share cost basis is now $2678.79/54 shares = $49.61/share. ”
Same as your original cost basis ($2705.85) divided by your shares on 02/24/14 (54.545454) gives a new per share cost basis of $49.61.
$2705.85 / 54.545454 = $49.61
It’s 2018 and I’m now getting around to calculating the VOD basis after the 2014 6/11 reverse split and VZ spinoff. I’ve read article and comment thread with great interest especially your 2014 reply to Anonymous above….I am puzzled just as he. My VOD basis prior to the split was 32K with 1100 odd shares. I got 600 odd shares of VOD, 307 of VZ and around 6k in cash. My 1099-Div at year end was about 21k which, sure enough, is the 6k cash plus the starting value of the 307 sh VZ so that makes sense. If I apply the original 32K VOD basis to the reduced # of shares, the avg cost is well above any price that the stock ever reached (so I have an unrealized loss as you state). I just wanted to double check that you stand by your original answer and that you don’t subtract the 21K that was “distributed” in 2014.
Multiply your original purchase by 6/11 to get the new amount of shares. Divide your original cost basis by your new amount of shares.