Stocks Split? Keep Good Records

Legendary investor Warren Buffett is doing something he’s always avoided — splitting shares of his beloved Berkshire Hathaway (Stock Quote: BRK.B). Each current share will be turned into 50.

It’s part of his purchase of Burlington Northern Santa Fe Corporation (Stock Quote: BNI) the railroad. The split will make it unnecessary for Burlington shareholders to receive partial Berkshire shares in the stock portion of the payment.

Splits of 50 for one are pretty rare, but many investors routinely experiences splits of two for one, three for two or some other combination. Splits don’t make shareholders any richer, since a typical two-for-one split would leave you with two $50 shares instead of one $100 share. Traditionally, companies split shares to keep prices low enough that investors can afford to buy in 100-share blocks.

But a split can leave you with a headache after you sell shares and must figure the tax implications of gains and losses. Along with reinvested dividends, splits can create a mess for the investor who hasn’t kept good records.

Berkshire Hathaway’s Class B shares are trading at about $3,380. If the split were to take place immediately, a new share would be worth about $68. Imagine you’d bought 10 Berkshire shares at the start of the decade, when they were trading for about $2,000. And suppose you sold them a few months from now for $70 each. How would you figure the tax on gains?

It’s not as tricky as it seems. Your “cost basis,” or the amount you paid, is $20,000. Forget that you’d received just 10 shares. Instead, pretend you’d bought 500, the number you’d have after the split. That makes your cost $40 per share. A share sold for $70 in a few months would have a long-term capital gain of $30. At the maximum long-term capital gains rate of 15%, the tax would be $4.50 per share.

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