How Do You Allocate Cost Basis After a Spinoff? (w/Examples) + FAQs

This article reflects federal rules and state rules as of June 2026 and covers tax years 2025 and 2026. Tax law changes — confirm current figures before you file.

Quick Answer

In a tax-free spinoff, you split your original cost basis between the parent and the new company based on their relative fair market values right after separation — not 50/50, and not by share count. In a taxable spinoff, the new shares get a fresh basis equal to the income reported to you.

When a company you own spins off a piece of itself, you wake up holding two stocks instead of one, and the IRS expects you to divide your old cost between them correctly. Get the split wrong and you either overpay tax now or set yourself up for a painful correction when you sell, since your basis controls your taxable gain.

This matters because spinoffs are common and the dollars add up. Spinoff activity stays heavy year after year, with hundreds of corporate separations tracked by analysts, and a single mis-allocation can shift thousands of dollars of capital gain into the wrong year.

📊 How to split one cost basis into two using the relative fair market value method.
🧮 Worked dollar-by-dollar examples, including the real Comcast/Versant 2026 spinoff math.
⚖️ The difference between a tax-free Section 355 spinoff and a fully taxable one.
💵 How cash received for fractional shares is taxed and why it surprises people.
🗺️ Whether your state follows the federal rule and what to file when you sell.

What a Spinoff Actually Is

A spinoff is when a parent company hands shareholders stock in one of its subsidiaries, creating a separate, independently traded company. You do not buy the new shares. They land in your brokerage account automatically, pro rata, based on how many parent shares you own on the record date.

Most large spinoffs are structured to be tax-free under Internal Revenue Code Section 355. That means you report no income just for receiving the shares, but you must carry your original investment forward and divide it. The legal mechanics that move your basis come from Section 358, which tells you to allocate basis by relative value, and Section 368, which defines the qualifying reorganization.

The consequence of ignoring the allocation is real. If you never split your basis, your broker or your tax software may treat the spinoff shares as having zero basis, so a future sale gets taxed on the full sale price as if it were pure profit. You would overpay capital gains tax for no reason, and you would have to amend returns to fix it.

Which Situation Applies to You?

The right method depends entirely on what kind of spinoff you received. Figure this out first, because the two paths use completely different math.

You received shares and no income showed up on your Form 1099 — this is almost certainly a tax-free Section 355 spinoff, so you split your existing basis by relative value.
You received shares and the company reported dividend income on your Form 1099 as of the spinoff date — this is a taxable spinoff, so your new shares get a basis equal to that reported income.
You only got a little cash for a fractional share — that cash is a small taxable sale, but it does not by itself make the whole spinoff taxable.
You bought your parent shares in several lots at different prices or dates — you must run the allocation separately for each lot, not on your account as a whole.

To confirm which type you have, read the “Material U.S. Federal Income Tax Consequences” section of the company’s information statement, usually filed as part of its Form 10 on SEC EDGAR. Companies also post a Form 8937 with the exact allocation percentages, which is your single most reliable source.

The Tax-Free Allocation Method, Step by Step

For a tax-free spinoff, the rule from Section 358 is simple to state: your old basis is split between parent and spinoff in proportion to their fair market values immediately after the distribution. The hard part is pinning down fair market value, because the statute does not define it.

The IRS lets you use the opening price, the closing price, the average of the high and low, or the volume-weighted average price (VWAP) on the first day the two stocks trade separately. Most filers use the closing price for simplicity, and most companies use it in their published Form 8937. Whichever method you pick, use it consistently for both stocks.

Here is the formula chain, which works for any tax-free spinoff:

Spinoff price per share × shares received per parent share = spinoff-equivalent value.
Parent price per share + spinoff-equivalent value = combined value.
Spinoff-equivalent value ÷ combined value = spinoff allocation %.
Parent price per share ÷ combined value = parent allocation %.
The two percentages must add to 100%.

Why the First Trading Day Matters

You must use prices from the first day the spinoff stock trades on a “regular way” basis, which is usually the business day after the distribution date. Spinoff shares often trade earlier on a “when-issued” basis, and using those preliminary prices can throw your percentages off. The consequence of grabbing the wrong day’s price is an allocation that does not match the company’s official Form 8937, which can trigger broker mismatches and IRS notices later. If you are unsure, default to the company’s published percentages, because the IRS does not require you to invent your own.

Worked Example 1: The Real Comcast/Versant Spinoff

This is a current, real transaction. On January 2, 2026, Comcast distributed Versant Media Group to shareholders, giving 1 Versant share for every 25 Comcast shares. Comcast published its allocation on Form 8937.

Comcast used the first-trading-day closing prices: $28.13 for Comcast and $40.57 for Versant. Running the formula gives a 94.55% allocation to Comcast and 5.45% to Versant. Now apply that to a real holder.

Say Maria owned 120 Comcast shares with a total basis of $1,200 ($10 per share). She received 4 Versant shares plus cash for a 0.8 fractional share.

Comcast basis: 94.55% × $1,200 = $1,134.60, or about $9.46 per share.
Versant basis: 5.45% × $1,200 = $65.40, spread across 4.8 shares, or about $13.63 per share.
The 0.8 fractional share carries about $10.90 of basis, which she uses to figure gain on the cash she got.

Maria reports no income for receiving Versant. Her holding period for the Versant shares dates back to when she first bought Comcast, not to January 2026, which matters for long-term capital gains treatment.

Worked Example 2: A Simple Hypothetical Split

Sometimes a company gives you a flat allocation percentage and you just apply it. Suppose James bought 100 shares of XYZ Corp on July 1, 2022, at $50 per share, for a $5,000 total basis.

XYZ spins off subsidiary ABC at 1 ABC share per XYZ share, and the Form 8937 says 7% of basis goes to ABC.

ABC basis: 7% × $5,000 = $350, or $3.50 per share.
XYZ adjusted basis: $5,000 − $350 = $4,650, or $46.50 per share.

Both holdings keep the original July 1, 2022 acquisition date for holding-period purposes. The consequence of skipping this step is that if James later sells ABC for $1,000, his software might show a $1,000 gain instead of the correct $650 gain, costing him tax on phantom profit.

Worked Example 3: A Taxable Spinoff

Not every spinoff is tax-free. When a spinoff fails the Section 355 tests, the company reports the value of the new shares to you as a taxable dividend on Form 1099-DIV.

Suppose Dana receives 50 shares of NewCo in a taxable spinoff, and her Form 1099-DIV reports $2,000 of dividend income for it.

Dana pays tax on the $2,000 now, as a dividend for the year of the spinoff.
Her basis in the 50 NewCo shares is $2,000 ($40 per share) — equal to the income reported.
Her holding period for NewCo starts on the spinoff date, not the parent purchase date.
Critically, her basis in the parent shares does not change in a taxable spinoff.

The common misconception is that seeing sale proceeds for a fractional share means the whole deal was taxable. It does not. Look for dividend income tied to the full distribution, not the small cash-in-lieu line.

Cost Basis Methods Compared

The table below shows how the two spinoff types differ on every point that affects your taxes.

Feature	Tax-Free Spinoff (Sec. 355)	Taxable Spinoff
Income when received	None reported	Dividend income on Form 1099-DIV
Parent basis	Reduced by the allocation %	Unchanged
Spinoff basis	A slice of your old basis (relative FMV)	Equal to the income reported to you
Holding period of new shares	Tacks back to original parent purchase	Starts on the spinoff date
Where you confirm it	Form 8937 and information statement	Form 1099-DIV and information statement

Cash in Lieu of Fractional Shares

Because spinoff ratios rarely divide evenly, you usually end up entitled to a fraction of a share. The company sells those fractions on the open market and sends you cash. That cash is a taxable sale, even inside an otherwise tax-free spinoff.

You report it as a capital gain or loss: the cash received minus the basis allocated to that fractional share. In Maria’s Comcast example, the 0.8 Versant fractional share held about $10.90 of basis, so if she received $12 of cash, she reports a small $1.10 gain. The gain is long-term if her original Comcast holding period was over a year.

The consequence of ignoring this is minor in dollars but real in compliance: brokers report the cash on Form 1099-B, so leaving it off your return can generate an automated CP2000 notice from the IRS. Report it on Form 8949 and Schedule D like any other sale.

How to Report It: Forms and Lines

Receiving a tax-free spinoff itself goes on no form — there is nothing to report until you sell. You simply record your new, split basis figures in your own records or your brokerage account.

When you eventually sell either stock, you report the sale on Form 8949, then carry the totals to Schedule D of your Form 1040. If you need help with the mechanics of that sale, see our guide on how to fill out Form 8949 and pair it with the Schedule D walkthrough.

For a taxable spinoff, the dividend income flows from your Form 1099-DIV to Schedule B (if your total dividends exceed $1,500 for the year) and onto your Form 1040. The deadline for all of this is the normal filing deadline, April 15, 2026 for the 2025 tax year, with the spinoff reportable in the year the distribution occurred.

Federal vs. State Treatment

Start with the federal rule: a qualifying Section 355 spinoff is tax-free and uses carryover, split basis. Most states that have an income tax begin from your federal taxable income, so they automatically follow the federal treatment and your allocated basis carries straight through.

A handful of situations diverge. Nine states — including Texas, Florida, Washington, Nevada, South Dakota, Wyoming, Alaska, Tennessee, and New Hampshire (which taxes only certain investment income through 2024 before its tax fully repeals) — impose no broad personal income tax, so the state-level basis question is moot for residents there. In community property states like California, spouses may need to track basis on a community basis, which can change per-spouse figures after a death or divorce. The consequence of assuming your state mirrors the IRS without checking is a mismatched state return, so confirm with your state department of revenue if you are in a community property or non-conforming state.

Mistakes to Avoid

Assigning zero basis to the spinoff shares — you overpay capital gains tax when you sell, sometimes by hundreds or thousands of dollars.
Splitting basis by share count instead of value — the law requires relative fair market value, so a share-count split produces wrong numbers and a wrong gain.
Using “when-issued” prices — preliminary prices distort your percentages and won’t match the official Form 8937.
Forgetting to allocate each lot separately — if you bought parent stock in multiple blocks, one blended allocation misstates basis on every block.
Resetting the holding period on tax-free spinoff shares — treating them as newly acquired can turn a long-term gain into a higher-taxed short-term gain.
Ignoring cash in lieu — leaving the small fractional-share sale off your return invites an IRS matching notice.
Assuming every spinoff is tax-free — a taxable spinoff means you owe tax now, and missing it understates your income.
Trusting your broker’s basis blindly — brokers often default spinoff basis to zero or estimate it, and the error becomes your problem at sale.

Do’s and Don’ts

Do find the company’s Form 8937 first — it gives you the exact, defensible percentages.
Do keep a written record of your original purchase price and date — basis can sit unused for a decade.
Do allocate each purchase lot on its own — the math only works lot by lot.
Do report cash-in-lieu as a small capital transaction — it is a real sale.
Do check whether the spinoff was taxable before assuming it wasn’t — the 1099 tells you.
Don’t split basis 50/50 — that is almost never the correct relative-value answer.
Don’t use the distribution date’s price if separate trading starts the next day — use the first separate-trading day.
Don’t discard your old brokerage statements — you need them to prove basis.
Don’t rely on memory for percentages — write them down the year of the spinoff.
Don’t skip a professional for a complex multi-lot or estate situation — the cost of an error exceeds the fee.

Pros and Cons of the Relative-Value Method

Pro: It follows the statute exactly, so your return matches what the company filed and what brokers report.
Pro: It preserves your long-term holding period, keeping gains at the lower long-term rate.
Pro: It defers all tax until you actually sell, so you keep more capital invested.
Pro: The company usually does the percentage math for you on Form 8937.
Pro: It produces consistent, auditable numbers across both stocks.
Con: It requires record-keeping that can span many years.
Con: Multiple purchase lots multiply the work.
Con: Fair market value is undefined, so two reasonable filers can reach slightly different percentages.
Con: Brokers frequently get spinoff basis wrong, forcing you to override their figures.
Con: Cash-in-lieo and taxable variants add reporting steps people overlook.

What to Do Next

Pull the company’s Form 8937 and information statement from its investor relations page or SEC EDGAR and note the allocation percentages.
Gather your original purchase records — price and date for every lot of parent stock you owned on the record date.
Apply the percentages lot by lot to compute new parent and spinoff basis figures, and save the worksheet.
Report any cash-in-lieu on Form 8949 and Schedule D for the spinoff year.
If the spinoff was taxable, report the dividend on Schedule B and record the new shares at their reported value.
Call a CPA or tax advisor if you have many lots, inherited shares, a community-property situation, or a spinoff you cannot confirm as tax-free.

This article is educational and is not a substitute for advice from a licensed tax professional about your specific situation. A spinoff with multiple purchase lots, inherited stock, or an unclear tax character is worth a CPA’s time, which typically involves a basis worksheet and a review of the company’s filings.

FAQs

How do you allocate cost basis after a spinoff?

By relative fair market value. In a tax-free spinoff, split your original basis between the parent and the new company in proportion to their share prices on the first day they trade separately. The percentages must total 100%.

Is a spinoff a taxable event?

No, usually not. A qualifying Section 355 spinoff is tax-free when received for the 2025 and 2026 tax years. You only owe tax later when you sell, except for the small cash received for fractional shares.

What is Form 8937?

An IRS information report companies file after a spinoff to disclose the basis allocation percentages. It is your most reliable source for the exact figures and is posted on the company’s investor relations page.

Does my cost basis change in a taxable spinoff?

No, the parent basis stays the same. In a taxable spinoff, your parent shares keep their original basis, and the new shares get a fresh basis equal to the dividend income reported on your Form 1099-DIV.

How do I tax cash received for a fractional share?

As a capital gain or loss. Subtract the basis allocated to the fractional share from the cash you received, and report the difference on Form 8949 and Schedule D for the spinoff year.

What holding period do my spinoff shares have?

The same as your original parent shares in a tax-free spinoff. The period tacks back to your original purchase date, which can qualify a quick sale for lower long-term capital gains rates.

Where do I report the sale of spinoff shares?

On Form 8949 and Schedule D. When you sell either the parent or spinoff stock, report each sale on Form 8949 and carry the totals to Schedule D of your Form 1040.

Do I split basis by number of shares?

No. You split by relative fair market value, not share count. A share-based split produces the wrong basis because the two stocks almost always trade at different prices after separation.

Which price do I use for the allocation?

The first separate-trading-day price. You may use the opening, closing, average, or volume-weighted price on the first day both stocks trade independently, usually the business day after the distribution.

Do states follow the federal tax-free spinoff rule?

Most do. States that start from federal taxable income generally adopt the carryover-basis treatment. Nine no-income-tax states make it irrelevant, and community-property states may track basis differently between spouses.

What if I bought parent stock in several lots?

Allocate each lot separately. Apply the spinoff percentages to every purchase block on its own using that block’s basis, because each lot has its own cost and acquisition date.

What happens if I assign zero basis to spinoff shares?

You overpay tax. A future sale gets taxed on the full sale price as if it were all profit, so you lose money and may have to amend the return to recover it.

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