(Charlene Rhinehart, CPA)
Ecommerce Giant Amazon (NASDAQ:AMZN) has finally pulled the trigger on plans for a 20-for-1 stock split this year. That means you get 19 extra shares for every Amazon share in your portfolio. If you currently own two Amazon shares, you might jump for joy when you notice 40 shares in your account after the big day.
Before you get too excited, let’s explain how a stock split works and how it might affect your taxes.
Image source: Getty Images.
Is a stock split good?
While it may seem like you’ve hit the jackpot when you hear about a stock split, it’s not as glamorous as it sounds. You will receive additional Amazon shares in your account, but the total value of your shares will not change.
Let’s say you owned $3,000 of Amazon stock before the split. After a 1:20 stock split, you now own 20 shares at $150 per share. The total value of all your shares is still $3,000.
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Stock splits may not affect the value of your stocks, but they’re a great way to get more people to invest. Instead of paying $3,000 for a share of Amazon, investors have the option to purchase a whole share for $150. If the four-digit share price has historically kept you from owning a whole share of Amazon, you have a chance to join the club after the stock split.
What you should know about taxes
Relax. I’m not going to throw thousands of tax considerations and forms at you. Stock splits are tax friendly. Because you don’t make any money from a stock split per se, you don’t have to pay any money to the IRS.
Let’s go through the entire chain of events so you understand why stock splits are not taxable.
- March 9, 2022: Amazon filed a Form 8-K announcing its intention to conduct a 20-for-1 stock split.
- May 25, 2022: Shareholders will vote on the stock split at the 2022 Annual General Meeting.
- May 27, 2022: Shareholders must be on record by this date to participate in the stock split.
- June 3, 2022: Amazon will give investors 19 additional shares for every share they hold.
- June 6, 2022: This is the day you can start buying whole Amazon shares at a reduced price.
As you can see from the timeline above, you are not entitled to any extra money as a result of the stock split. Therefore, you do not have to declare this on your taxes. There is nothing mentioned above that would sound the alarm and make the stock split a taxable event for shareholders.
There may be costs involved in selling your shares
In the case of a stock split itself, you don’t have to declare income on your tax return. However, selling Amazon stock before or after the split is a different story.
Let’s say you buy a share of Amazon before the stock split. Your one share becomes 19 additional shares as a result of the 1:20 stock split. If the stock goes up and you decide to pull the trigger and sell half your shares immediately after the split, you’ll be on the hook for short-term capital gains taxes. These tax rates can go up to 37% if you are a high earner.
If you hold onto your shares for over a year before selling, you have a chance to unlock long-term capital gains rates. Investors enjoy capital gain rates because they can get a deal on their tax bill. Below are the long-term capital gains rates for 2022 in case you’re thinking of hitting the sell button.
|
For single parents with a taxable income of … |
For married spouses with taxable income of … |
For heads of household with a taxable income of … |
…this is the long-term rate of return on capital |
|---|---|---|---|
|
$0 to $41,675 |
$0 to $83,350 |
0 to $55,800 |
0% |
|
$41,676 to $459,750 |
$83,351 to $517,200 |
$55,801 to $488,500 |
fifteen% |
|
Over $459,750 |
Over $517,200 |
Over $488,500 |
20% |
your next step
If you already own shares of Amazon, you’ll wake up with additional shares in your account in June when the stock split goes ahead. The best part is that you don’t have to do any legwork to gain access to the shares. Your brokerage firm takes care of the logistics while you celebrate what’s in store for this tech giant. Additionally, due to the stock split, you will not receive a tax bill from the IRS. If you believe in Amazon’s future potential, it’s a good idea to hold onto all of your shares and celebrate the company’s growth.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Charlene Rhinehart, CPA owns Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.