GroundSkill
Treat stock splits, partnership interests, and nonstatutory options
Investments can change without a sale: one share becomes two in a split, a partnership interest carries debt and suspended losses inside it, and an option can turn into wages before it ever turns into stock. This lesson works out the tax on each change. Splits and nontaxable dividends spread the old basis over more shares, partnership sales split into ordinary and capital portions with PTP loss limits, and nonstatutory options pay compensation at exercise while plain puts and calls follow capital rules.
A nontaxable stock dividend or split gives you more shares for the same investment, so the old per-share basis is spread over old and new shares: divide the adjusted basis of the old stock by the total share count. Identical stock split 2-for-1 halves the per-share number while the total stays put. When the shares were bought at various times and prices, allocate the new shares to each lot: 10 shares bought for $400 and 10 bought for $700 split 2-for-1 into 20 shares at $20 and 20 shares at $35. When the nontaxable dividend is stock that is not identical to the shares held, divide the old basis between the old and new lots by relative fair market value on the distribution date: a $200 basis with $300 of common value and $100 of preferred value leaves $150 with the common and $50 with the preferred. A taxable dividend works the opposite way: the new shares take fair market value and the old basis stands still. Brokerage records and schedules carry these lots forward.
An investor owns 50 shares bought for $2,000. A 2-for-1 split leaves her with 100 shares, so each share carries $2,000 ÷ 100 = $20 of basis. Selling 40 shares at $30 brings $1,200 of proceeds against $800 of basis, a $400 gain, and the 60 kept shares still carry $1,200 of basis.
Publication 550 Page 31
Generally, stock dividends and stock rights are not taxable to you, and you do not report them on your return.View on the source
Publication 550 Page 63
divide the adjusted basis of the old stock by the number of shares of old and new stock. The result is your basis for each share of stock.View on the source
Publication 550 Page 64
Stock splits. Figure the basis of stock splits in the same way as stock dividends if identical stock is distributed on the stock held.View on the source
Publication 550 Page 64
If your stock dividend is taxable when you receive it, the basis of your new stock is its fair market value on the date of distribution. The basis of your old stock does not change.View on the source
Publication 550 Page 63
Stock bought at various times. Figure the basis of stock dividends received on stock you bought at various times and at different prices by allocating to each lot of stock the share of the stock dividends due to it.View on the source
Publication 550 Page 63
New and old stock not identical. If the new stock you received as a nontaxable dividend is not identical to the old stock on which it was declared, the basis of the new stock is figured differently. Divide the adjusted basis of the old stock between the old and the new stock in the ratio of the fair market value of each lot of stock to the total fair market value of both lots on the date of distribution of the new stock.View on the source
An investor bought 100 shares of common stock for $2,000. The corporation then declared a nontaxable 2-for-1 stock split of identical stock, so the investor holds 200 shares. Which of the following is correct regarding basis?
Selling a partnership interest works like selling any asset, with two extras. The amount realized includes any partnership debt the seller is relieved of, and any portion of the gain tied to unrealized receivables or depreciation recapture potential comes out as ordinary income while the remainder stays capital. The capital remainder is sorted by holding period: 1 year or less is short term and longer than 1 year is long term. A publicly traded partnership interest adds special limits: each PTP's passive limits apply separately, so its losses offset only the same PTP's passive income and the excess carries forward. Selling the entire interest to an unrelated person in a fully taxable deal lifts the limit and frees the suspended losses. If the PTP activity ends the year with an overall gain, the net gain portion (total gain minus total losses) is nonpassive income. The special allowance for rental real estate activities doesn’t apply to PALs from a PTP.
A partner sells a PTP interest for $28,000 cash plus $5,000 of liability relief, realizing $33,000 against a $27,000 adjusted basis: a $6,000 gain. Her $4,000 share of depreciation recapture potential is ordinary income and the other $2,000 is capital gain. She also carried a $9,000 suspended PTP loss; because she sold her entire interest to an unrelated buyer in a fully taxable sale, the $9,000 is freed this year.
Publication 541 Page 16
The sale or exchange of a partner’s interest in a partnership usually results in capital gain or loss.View on the source
Publication 541 Page 16
Gain or loss is the difference between the amount realized and the adjusted basis of the partner’s interest in the partnership.View on the source
Publication 541 Page 17
You report as ordinary income your $5,000 share of potential ordinary income from the partnership’s depreciable property. The remaining $5,000 gain is a capital gain.View on the source
Form 8582 Instructions Page 15
PALs from a PTP may generally be used only to offset income or gain from passive activities of the same PTP.View on the source
Form 8582 Instructions Page 16
If you have an overall loss and you disposed of your entire interest in the PTP to an unrelated person in a fully taxable transaction during the year, your losses (including prior-year unallowed losses) allocable to the activity for the year aren’t limited by the passive loss rules.View on the source
Publication 541 Page 16
If the selling partner is relieved of any partnership liabilities, that partner must include the liability relief as part of the amount realized for their interest.View on the source
Publication 544 Page 54
Generally, if you hold a capital asset 1 year or less, the gain or loss from its disposition is short term. Report it in Part I of Form 8949 and/or Schedule D, as applicable. If you hold a capital asset longer than 1 year, the gain or loss from its disposition is generally long term. Report it in Part II of Form 8949 and/or Schedule D, as applicable.View on the source
Form 8582 Instructions Page 15
If you have an overall gain, the net gain portion (total gain minus total losses) is nonpassive income.View on the source
Form 8582 Instructions Page 15
The special allowance for rental real estate activities (including CRDs) doesn’t apply to PALs from a PTP.View on the source
Kumar's adjusted basis in his partnership interest is $20,000, which includes his $15,000 share of partnership liabilities. The partnership's assets consist of cash and securities held for investment. He sells the interest for $10,000 cash plus relief of his $15,000 liabilities, and he has been paid his share of partnership income for the year. Which of the following is correct?
Employee options and market options follow different rules. A nonstatutory stock option without a readily determinable grant-date value produces nothing at grant; at exercise the spread between price paid and vested value is compensation, and the stock's basis becomes price paid plus that inclusion, so the later sale splits into wages already taxed plus capital gain or loss. When the stock is not substantially vested at exercise, no amount is included then; the spread is included when the property becomes substantially vested. Listed puts and calls are simpler capital assets: sell the contract for a capital gain or loss by holding period, let it expire for a capital loss, exercise a call by folding the premium into the stock's basis, or exercise a put by reducing the sale proceeds. Commodity futures options are nonequity options that may be section 1256 contracts, which are generally treated as sold at fair market value on the last business day of the tax year. The holder rules above cover puts and calls on securities. A writer who grants a put or a call carries the premium in a deferred account instead of reporting it at receipt, and if the obligation expires the amount received is short-term capital gain.
An employee holds a nonstatutory option for 100 shares at $10 with no determinable grant value. She exercises when the vested stock is worth $28: ($28 − $10) × 100 = $1,800 of ordinary income, and her stock basis is $1,000 paid plus $1,800 included = $2,800. Selling later at $35 brings $3,500 against that $2,800 basis, a $700 capital gain. Separately, she buys a listed call for $300 and sells the contract for $500: a $200 capital gain by her holding period.
Publication 525 Page 11
If the FMV of the option isn’t readily determinable at the time it’s granted to you (even if it’s determined later), you don’t have income until you exercise or transfer the option.View on the source
Publication 525 Page 11
The amount to include in your income is the difference between the amount you pay for the property and its FMV when it becomes substantially vested.View on the source
Publication 525 Page 11
If it isn’t substantially vested at the time you exercise this nonstatutory stock option (so that you may have to give the stock back), you don’t have to include any amount in income. You include the difference in income when the option becomes substantially vested.View on the source
Publication 525 Page 11
Your basis in the property you acquire under the option is the amount you pay for it plus any amount you included in income upon grant or exercise of the option.View on the source
Publication 550 Page 89
If you exercise a put, reduce your amount realized on the sale of the underlying stock by the cost of the put when figuring your gain or loss.View on the source
Publication 550 Page 89
If you sell the put or the call before you exercise it, the difference between its cost and the amount you receive for it is either a long-term or short-term capital gain or loss, depending on how long you held it.View on the source
Publication 550 Page 88
Gain or loss from the sale or trade of an option to buy or sell property that is a capital asset in your hands, or would be if you acquired it, is capital gain or loss.View on the source
Publication 550 Page 89
If you exercise a call, add its cost to the basis of the stock you bought.View on the source
Publication 550 Page 89
If the option expires, its cost is either a long-term or short-term capital loss, depending on your holding period, which ends on the expiration date.View on the source
Publication 550 Page 56
Nonequity options include debt options, commodity futures options, currency options, and broad-based stock index options.View on the source
Publication 550 Page 56
If you hold a section 1256 contract at the end of the tax year, you must generally treat it as sold at its fair market value on the last business day of the tax year.View on the source
Publication 550 Page 89
If you write (grant) a put or a call, do not include the amount you receive for writing it in your income at the time of receipt.View on the source
Publication 550 Page 89
If your obligation expires, the amount you received for writing the call or put is short-term capital gain.View on the source
An employee receives a nonstatutory stock option that is not actively traded, cannot be transferred, and cannot be exercised immediately in full. The exercise price is $20 per share for 100 shares. The employee exercises while the stock is not substantially vested, paying $2,000. The stock becomes substantially vested when each share is worth $24, and the employee later sells each share for $26. Which of the following is correct?
The course asks you questions like these as you learn, brings back the ones you miss, and ends with full-length practice exams.
See the course Or take the free 12-question checkGroundSkill is independently produced and is not affiliated with or endorsed by the IRS. Sources last checked 2026-09-14. Exam preparation, not tax advice.