Dealing with a payment for fractional shares can be tricky.
Most taxpayers deal with Schedule D when they sell some of their investment holdings. Yet in some situations, you might end up dealing with Schedule D even when you didn't make any investment sales at all. One example involves receiving cash in lieu of fractional shares as part of a merger or spinoff, and reporting that cash correctly can be harder than you might think.
A common situation for cash in lieu
Cash in lieu of fractional shares comes up most frequently when you own stock in a company that goes through a major transformative event. In merger situations, shareholders in the target company often receive shares of the acquiring company in exchange for their existing holdings, and it's rare for the ratio of new shares received to be a round number. Similarly, if a company spins off part of its business as a separately traded stock, shareholders might receive a certain number of shares of the spun-off entity for every share of the existing company they own.
Most companies and brokers don't like handling fractional shares, so if the math works out unevenly, they'll typically just take whatever fraction of a share you would have received under the formula, and essentially sell it automatically, paying you the resulting cash. This cash gets reported on a 1099 form as cash in lieu of fractional shares, and like any sale, you have to account for it on Schedule D.
The hassle of cash in lieu
Unfortunately, many brokers don't do a good job of giving you information about cash in lieu transactions. Technically, you'll have cost basis in whatever fractional shares produced the cash in lieu, and so you won't owe taxes on the full amount of the cash you received. You'll report both the cash and the basis on Schedule D, noting the sale of whatever fractional share resulted from the transaction.
The problem is that the necessary basis information usually isn't available until after the transaction goes through. Therefore, you'll often have to look it up yourself, and correct mistaken information on a 1099.
Also, keep in mind that if you allocate cost basis to the fractional shares, you'll have to reduce your remaining cost basis in the shares you continue to own. Typically, the dollar figures are fairly small, but any disparity in what you report versus what your broker reports could trigger warning flags that the IRS can pick up.
Cash in lieu of fractional shares is generally a nuisance, with the small amounts involved causing more trouble than they're arguably worth. Nevertheless, treating cash in lieu correctly on Schedule D can prevent a much bigger IRS problem down the road.
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FAQs
Technically, you'll have cost basis in whatever fractional shares produced the cash in lieu, and so you won't owe taxes on the full amount of the cash you received. You'll report both the cash and the basis on Schedule D, noting the sale of whatever fractional share resulted from the transaction.
How do you report cash in lieu on Schedule D? ›
Report this transaction on Form 8949. Enter your gain or loss, the difference between the cash you receive and the basis of the fractional shares sold, in column (h) of Schedule D (Form 1040) in Part I or Part II, whichever is appropriate."
How do you account for cash in lieu? ›
When reporting your cash in lieu payment, you will need Form 1099-B, as well as:
- Original cost basis (which is the original price or cost of the asset at purchase)
- Purchase date.
- Stock split date (or the date of the merger, acquisition or spin off)
- Reason why the cash in lieu of fractional shares was issued.
To accurately report your cash in lieu payment, you'll need the Form 1099-B, your original cost basis, the date you purchased the stock, the date of the stock split or other corporate action, and the reason why you received the cash in lieu of fractional shares.
What is cash in lieu of fractional shares 1099-B? ›
A company you invested in might send you a check instead of crediting a fractional share to your stock account. You might also receive a Form 1099-B at the end of the year with the description of “cash in lieu.”This is for the cash (the check) you received in place of receiving a fractional share.
Where does cash in lieu go on a tax return? ›
The hassle of cash in lieu
You'll report both the cash and the basis on Schedule D, noting the sale of whatever fractional share resulted from the transaction.
How to report substitute payments in lieu of dividends or interest? ›
Generally, any income from your sale of these products is shown on Schedule C. Box 8: Shows substitute payments in lieu of dividends or tax-exempt interest received by your broker on your behalf as a result of a loan of your securities. This amount is shown on the line labeled "Other income" of Form 1040.
What is an example of cash in lieu? ›
An example: The premium for the lowest-cost minimum value plan is $400/month. The employer contribution is 50%, so the employee pays $200/month. The employer also offers all eligible employees $100/month as a “cash in lieu of benefits” amount if they decline coverage.
How is cash in lieu of dividends taxed? ›
Currently, qualified dividends have maximum rates of 0% to 20% depending on your regular tax bracket, but they always save you at least 10 percentage points on the tax rate you pay on the dividends. Payments in lieu don't qualify for that favorable treatment and get taxed at ordinary income rates.
Is cash in lieu included in distributions? ›
Cash-in-Lieu (of fractional shares) transactions are normally imported as distributions or deposits into Cash. The Cash in Lieu price is usually not provided by the company generating a spin-off, merger, or split.
Cash in lieu of fractional shares is a type of payment where investors get cash instead of a fractional share or a partial share of a stock.
What does cash in lieu of shares mean? ›
Cash-in-lieu is payment of cash instead of stock when a stock splits or changes and the shareholder only owns a partial share. Shareholders must complete and return the form with the securities in order to receive cash-in-lieu payment or exchanged securities.
What is a stock dividend in lieu of cash? ›
A stock dividend, a method used by companies to distribute wealth to shareholders, is a dividend payment made in the form of shares rather than cash. Stock dividends are primarily issued in lieu of cash dividends when the company is low on liquid cash on hand.
How to report cash in lieu on Schedule D? ›
Report this transaction on Form 8949. Enter your gain or loss, the difference between the cash you receive and the basis of the fractional shares sold, in column (h) of Schedule D (Form 1040) in Part I or Part II, whichever is appropriate."
What does lieu of shares mean? ›
Shares In Lieu means an award of shares, or units denominated in shares, which settle an earned cash obligation of the Company related to compensation. An award of Shares In Lieu consists of shares, or units denominated and payable in shares, which have no service or other traditional vesting requirement or period.
What are shares in lieu? ›
Any person who exercised an option to acquire shares in a company in lieu of a cash distribution from that company is deemed to have received income, equal to the sum they would have received if they had received the distribution in cash from that company.
How do I report cash liquidation distributions on my tax return? ›
Any liquidating distribution you receive is not taxable to you until you have recovered the basis of your stock. After the basis of your stock has been reduced to zero, you must report the liquidating distribution as a capital gain.
What can be reported directly on Schedule D? ›
Use Schedule D (Form 1040) to report the following:
- The sale or exchange of a capital asset not reported on another form or schedule.
- Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit.
Cash-in-lieu is payment of cash instead of stock when a stock splits or changes and the shareholder only owns a partial share. Shareholders must complete and return the form with the securities in order to receive cash-in-lieu payment or exchanged securities.
