Computing cost basis again: Multiple stock spinoffs

— -- Q: How do you calculate the cost basis of stocks where the original company has split into two or more other companies and you get different numbers of shares from each?

A: This is another question that keeps coming up, so I'd like to give you as much detail as possible.

Generally, tracking your cost basis for a stock is a simple matter of recording in some way the price you paid and your commission, including any reinvested dividends. If you track this information, using paper or a computer file, you'll be in good shape when you sell.

But sometimes stuff just happens to complicate that. Stock splits, for instance. Sometimes companies cut their share price and increase the number of shares outstanding. For instance, in a two-for-one split, a $100-a-share stock with 100 million shares outstanding becomes a $50-a-share stock with 200 million shares outstanding. If this happens, you need to divide your cost basis by 2 to adjust your per-share price for the split. You can read more here about stock splits.

You're asking about yet another complicating factor: A corporate restructuring. From time to time, a company might choose to break itself into pieces. Shareholders will usually be issued shares in the spinoff company or companies. You will need to similarly break your cost basis into parts.

Consider this example: Say you bought 12 shares of ABC on Jan. 1, 2007 for $45 a share. Assuming no commissions, your cost basis would be $45 a share or $540.

Now, on Jan. 1, 2009 the company announces it's splitting itself into three equal companies, Company A, Company B and Company C.

Here's what would happen. The company would take your ownership in ABC and divide by three. So, your original 12 shares of ABC would equal four shares of Company A, four shares of Company B and four shares of Company C.

What about your cost basis? You would simply perform the same math. Dividing your $45-a-share cost basis of ABC by three, you'd arrive at a new cost basis of $15 a share for Company A, $15 a share for Company B and $15 a share for Company C.