Stock Splits and Reverse Splits: What Happens to Cost Basis

The share count changes; the total basis does not

Investor.gov’s glossary defines a stock split as “an increase in the number of shares of a corporation’s stock without a change in the shareholders’ equity,” and gives the standard illustration: 100 shares trading at $100 become 200 shares at $50 after a two-for-one split. If the company pays a dividend, the dividend per share falls proportionately.

Cost basis is a separate record from the share count. IRS Publication 550 describes the basis of stock as generally “the purchase price plus the costs of purchase, such as commissions and recording or transfer fees,” and says basis must be adjusted when you receive more stock from a nontaxable stock dividend or a stock split. Adjusted, not recreated: the total you paid stays on the books.

A reverse split is the same arithmetic with a ratio below one. Investor.gov’s reverse-split entry defines it as converting “each outstanding share … into a fraction of a share,” and gives a one-for-ten reverse split as its example, turning 10,000 shares into 1,000.

The arithmetic in both directions

Write the ratio as new shares per old share: 2 for a two-for-one split, 0.1 for a one-for-ten reverse. Then:

• new share count = old share count × new shares per old share
• basis per share = total basis ÷ new share count
• total basis = unchanged, unless the broker pays cash for a fractional share

Publication 550 states the identical-stock case directly. Under nontaxable stock dividends, when “the new stock … is identical to the old stock,” you “divide the adjusted basis of the old stock by the number of shares of old and new stock.” Its first example: one share bought for $45, two new shares for each share held, three shares in total, basis $15 each ($45 ÷ 3). The stock-split paragraph then says to figure the basis of a split “in the same way as stock dividends if identical stock is distributed on the stock held.”

Lots stay separate. The second example on the same page holds one share bought for $30 and one bought for $45; after a two-for-one distribution there are six shares, “three with a basis of $10 each ($30 ÷ 3) and three with a basis of $15 each ($45 ÷ 3).” The split scales each lot rather than merging them into an average, which matters for specific-share sales: Publication 550 says that if you can “adequately identify” the shares sold, their basis is the basis of those particular shares.

A worked example from 100 shares to 20

Start with 100 shares bought at $40: 100 × $40 = $4,000 total basis.

After a two-for-one split:

• new count = 100 × 2 = 200 shares
• basis per share = $4,000 ÷ 200 = $20.00
• price per share, all else equal = $40 ÷ 2 = $20.00

Then a one-for-ten reverse split:

• new count = 200 × 0.1 = 20 shares
• basis per share = $4,000 ÷ 20 = $200.00
• price per share, all else equal = $20 × 10 = $200.00
• position value = 20 × $200 = $4,000

The identity to check on any statement is 100 × $40 = 200 × $20 = 20 × $200 = $4,000. If the statement instead shows 20 shares at $100, the split arithmetic has not failed: 20 × $100 = $2,000, a market loss of $2,000 against the $4,000 basis, not a consequence of the ratio.

Now apply the reverse to 105 shares bought at $40:

• 105 × $40 = $4,200 total basis
• new count = 105 × 0.1 = 10.5 shares, so 10 whole shares plus a 0.5 fraction
• basis per share = $4,200 ÷ 10.5 = $400.00
• at the mechanical post-split price of $40 × 10 = $400, the 0.5 is cashed at 0.5 × $400 = $200
• basis allocated to the fraction = 0.5 × $400 = $200
• amount realized $200 − $200 = $0, so at the split price the cash-out breaks even
• if the market price is $300 when the split takes effect, the cash is 0.5 × $300 = $150 and the realized loss is $150 − $200 = −$50
• remaining 10 shares keep 10 × $400 = $4,000, and $4,000 + $200 = $4,200

Publication 550 says cash received for fractional shares under such a plan “is treated as an amount realized on the sale of the fractional shares,” reported on Form 8949. The cash-in-lieu step is a small sale with its own proceeds and its own share of the basis.

Where the naive reading goes wrong

Preserving the per-share basis instead of the total. The per-share figure is derived. Forcing the old $40 basis onto the new shares after a two-for-one split doubles the recorded basis from $4,000 to $8,000 and understates the gain on every later sale.

Reading a reverse split as a loss. Ten shares becoming one looks like a 90% loss on a share-count screen. Investor.gov says investors “may lose money as a result of fluctuations in trading prices following reverse stock splits” — that is the market repricing the company, not the ratio.

Treating cash in lieu as a nontaxable rounding. The fractional-share payment disposes of those shares: it has proceeds, an allocated basis and a gain or loss, reported on Form 8949.

Assuming the split merges lots. Publication 550 scales each lot by the ratio and keeps their bases distinct.

What the primary sources do and do not say

The investor.gov stock-split entry supplies the definition, the two-for-one price example and the dividend note. It says nothing about cost basis or tax.

The investor.gov reverse-split entry supplies the mechanics, the one-for-ten example, the observation that small shareholders are sometimes “cashed out” in place of partial shares, and the point that state corporate law and a company’s articles generally govern whether a reverse split can be declared. It does not state how the cash is taxed.

Publication 550 supplies the basis rules: the purchase-price definition, the adjustment for splits, the identical-stock division, the multiple-lot examples, and the fractional-share treatment. It does not use the phrase “reverse split,” and its fractional-share paragraph is written in the context of stock dividends; the stock-split paragraph directs you there only when identical stock is distributed. Whether a broker cashes out a fraction at all depends on the broker, and the treatment of any cash outside the US federal rules depends on your jurisdiction.

A checklist for the statement you receive

1. Recompute the total. Old count × old price should equal new count × new price, and the total basis should be identical to the cent unless cash was paid in lieu.
2. Derive the per-share basis. Divide the total by the new count; do not carry the old per-share figure forward.
3. Check each lot. Every lot should be scaled by the same ratio and still visible separately.
4. Account for any cash. Identify the fraction sold, the price used, the basis allocated to it and the resulting gain or loss.
5. Reconcile the broker’s report. A restated average cost is the broker’s record; compare it with your own arithmetic before relying on it.
6. Keep the corporate notice. Investor.gov notes that a reporting company may announce a reverse split on Form 8-K, 10-Q or 10-K.

Not tax advice. This article applies the arithmetic and the US federal rules stated on the pages cited; it does not cover state or non-US tax or your own facts.

How these sources were checked

Investor.gov, “Stock Split” glossary entry, retrieved 2026-10-23. Investor.gov, “Reverse Stock Splits” glossary entry, retrieved 2026-10-23. Internal Revenue Service, Publication 550 (2025), Investment Income and Expenses, retrieved 2026-10-23.