Figuring cost basis of a spin-off isn't too tough

— -- A2: On March 28, shareholders of Altria got a little bit 'MO stock.

Altria, maker of cigarettes and other tobacco products, shifted all its ownership of Philip Morris International to shareholders. If you owned Altria on March 19, you were given shares of Philip Morris International on March 28. Shareholders received one share of Philip Morris International for every share of Altria they owned.

But here's the question I've gotten from several Ask Matt readers: What if you sell your Altria or Philip Morris International stock? What is your cost basis for tax purposes?

The question comes up frequently. What should you do if you own a stock that spins off a piece?

Since this is such a popular and recent example, let's use Altria and Philip Morris International. Before we get started, it's important to note that tax situations can get quite complex. But I can give you an example on how the cost basis could be determined in many cases.

The first step is to figure out how much of what you paid for Altria is attributed to Altria and how much to Philip Morris International. One method is to take the closing share prices of each stock and come up with an allocation.

We know Altria closed at $22.20 on March 31, the first trading day after PM was split off. That day, Philip Morris International closed at $50.58. The value of the two stocks together was $72.78. That means that Altria shares account for 30.5% of your cost basis, since $22.20 divided by $72.78 is 30.5%. Similarly, Philip Morris International accounts for 69.5% of the cost basis, or $50.58 divided by $72.78.

Next, you need to know your original cost basis in Altria. You should have the cost basis, since it would have been your basis even if the spinoff never happened. Let's say you bought 100 shares of Altria for $70 a share before the spinoff. To figure your cost basis in Altria after the spinoff, multiply $70 by the allocation factor of 30.5%, or $21.35 a share. To figure your cost basis in Philip Morris International, multiply your original Altria cost basis of $70 by the allocation factor of 69.5%, or $48.65. And that's it.