The tax treatment of stock splits and reverse stock splits does not immediately affect your taxes. In a stock split, you get more shares, but the total value of your investment stays the same. Similarly, in a reverse stock split, the company reduces the number of shares, but again, the total value remains unchanged. Taxes are triggered only when you sell the shares, and the capital gains tax depends on the sale price compared to your original investment cost.

What Is a Stock Split?

A stock split is when a company issues more shares to its shareholders, reducing the price per share but not affecting the total value of the investment. For example, in a 2-for-1 stock split, if you had one share before, you will now have two shares, each worth half the original price. However, the total value of your holdings remains the same.

Tax Treatment of Stock Splits

When a stock split occurs, there are no immediate tax implications. You do not owe taxes at the time of the split. The tax will be applicable when you sell the shares, and it will be based on the capital gains or losses, which are the difference between the sale price and the original purchase price.

What Is a Reverse Stock Split?

A reverse stock split is the opposite of a stock split. The company reduces the number of shares in circulation, making each share more valuable. For example, in a 1-for-2 reverse stock split, if you had two shares, you would now have one share, but the price per share would double. Again, the total value of your investment does not change.

Tax Treatment of Reverse Stock Splits

Like a regular stock split, a reverse stock split does not trigger any immediate taxes. However, it does impact the cost basis of your shares. After the reverse split, your cost basis per share increases, but the total cost basis remains the same. Taxes will only be applied when you sell the shares, based on the adjusted cost basis and the selling price.

How Does a Stock Split Affect Your Taxes When You Sell?

When you sell shares after a stock split, your capital gain or loss is determined by the difference between your sale price and your adjusted cost basis. For example, if you originally purchased one share for ₹100 and the stock splits 2-for-1, your new cost basis per share will be ₹50. If you sell the shares for ₹80 each, you will pay taxes on the profit of ₹30 per share, considering the adjusted cost basis.

What Happens to the Cost Basis After a Stock Split?

When a stock split happens, the cost basis per share is adjusted. For example, if you bought 100 shares at ₹100 each, and the company announces a 2-for-1 stock split, you will now own 200 shares, but the cost basis per share will be ₹50. The total cost of your investment remains unchanged, but the cost basis per share decreases.