How to handle a security exchange

Hi, Mark.

This topic comes up often here. One more time...

Step 1: Determine what happened in the real world.

Step 2: Record what happened (using pen and paper or Quicken or whatever method you choose).

Trying to do Step 2 before Step 1 just won't work!

Unless it fits within one of the few special IRC sections, every exchange is taxable just like a sale. The selling price is the Fair Market Value (FMV) of the shares given up or the shares received, whichever can be more reliably determined; the two FMVs should be identical, of course. In other words, report the sale of your old stock (KGRAX) for the FMV of the shares you received for it.

Those code sections that exempt some exchanges from the general rule depend largely on WHY the exchange happened (merger, acquisition, etc.). We might be able to tell you WHY if you tell us the name of the companies involved and the managing company. Chances are, they mailed you tons of fine-print documents that explained it. Or you probably can go to the website for one or more of the companies and look in the pages for Investor Relations or something similar. Some companies even present worked-out examples of how to account for the transaction. If you can't locate the websites, tell us the names of the companies and we may be able to help you find the information.

If there is no exemption from the special treatment, then you should record the sale of KGRAX at FMV, as I said, recognizing any gain or loss as short-term or long-term, as appropriate. Then record the purchase of the SDGAX shares for the same total FMV on the date of the exchange.

All this assumes that you are a typical US taxpayer. If you are in Canada or some other location, the rules are probably different. And, since I've been retired for a dozen years, be sure to check with your own CPA as to the current tax rules.

RC