As we wrap up the functional changes that we discovered during the Realized app beta testing, one new feature stands out. Early on, we saw that stock splits complicate the calculation of capital gains. One of the first features built into our automated tax lot setup included the handling of stock splits.

For any lot affected by a stock split, the Realized app will calculate the number of post-split shares. This requires no effort on the part of the user.

Mergers and tax lots needed a solution

During the beta test, we came across the merger of WYE (Wyeth) with PFE (Pfizer). The merger is actually a taxable acquisition using both PFE shares and cash boot.

We wondered how the thousands of WYE shareholders calculated the cost basis in their new PFE shares. Depending upon the cost basis for each of their pre-merger WYE tax lots, many had taxable capital gains, even though they sold no WYE stock. Some avoided the headache and passed the problem on to their tax accountants.

To provide our customers with full automation of the tax lot process, we went forward with adjusting tax lots for mergers. Going beyond the WYE/PFE merger, different merger types (either all stock, all cash or stock plus boot) require different handling. The end result: Realized will effortlessly maintain the cost basis for all tax lots, including stocks going through mergers.

No more headaches.

Public launch imminent

If all goes according to plan, next week we will begin a preview period during which anyone may setup a Realized account. To receive a notification when the preview begins, go to www.realized-app.com.

WFMI (Whole Foods Market, Inc) had a 2 for 1 stock split on December 28, 2005. Before the split you bought 300 shares of WFMI at $60 per share.

Realize a capital gain

During 2008 you sold 200 WFMI shares for $20 each and realized a sale amount of $4,000. To figure the capital gain (or loss), you need to determine the cost basis of the sale.

After searching your trade history, you find the 300 share purchase with a trade amount of $18,000 (300 shares times $60). The WFMI position had a cost basis of $60 per share before the split.

The sale of 100 shares prior to the split did not change the cost basis per share. After that sale the 200 shares of WFMI had total cost basis of $12,000 (200 shares times $60).

A stock split leaves total cost basis unchanged

The stock split had no effect on the $12,000 total cost basis. The 200 shares received due to the stock split did halve the cost basis per share to $30 ($12,000 divided by 400 shares).

The sale during 2008 of 200 shares would have a cost basis of $6,000 (200 shares times $30 per share). Thus, you realized a long-term capital loss of $2,000.

A tax lot clarifies the effect of a stock split

A 300 share purchase would create a new tax lot with a cost basis of $18,000. This tax lot would have its shares reduced to 200 by a sale. The sale would lower the total cost basis to $12,000. At $60, the cost basis per share would remain unchanged.

After a 2 for 1 stock split, the share quantity of the tax lot would double to 400. The total cost basis would stay the same. With twice as many shares, the cost basis per share would halve to $30.

Divide split shares among tax lots for multiple purchases

Your portfolio might include several WFMI purchases with share quantities of 250, 350 and 400. The broker would report that you have received 1,000 shares due to the stock split.

The cost basis and holding period for the added shares correspond to each of the three purchases. Without using tax lots, sorting out the cost basis of various shares can become a burden.