reverse stock split and tax implications

[pan2]

Let's say I have 25 shares of company A which I bought at a cost basis of $X / sh. Now suppose there's a 1:10 reverse stock split. So I end up with 2 shares of the new stock at cost basis $10X / sh and my broker also liquidates 5 of the old shares since I can't get a half-share. How should the proceeds from this liquidation be treated on my tax return? It looks like, on my statement, my broker has called this a dividend, but then I'm not so happy about that since it neglects the fact that this "dividend" cost me $5X when I bought those liquidated shares originally. In my case the stock has gone down so that dividend obscures the fact that I've actually *lost* money on the transaction. How should this be reported?

[sweeps]

Why can't your broker handle fractions of a share?

I would think if a portion of the stock was liquidated, it would be a capital gain or loss, not a dividend.

[pan2]

Not sure about the "why". This is TDWaterhouse and on my monthly statement the liquidated fractional share is categorized as a dividend. I haven't seen my end of year 1099 so maybe it'll be treated differently there. It certainly seems to me like a capital gain/loss.

[sweeps]

Regardless I would make sure you get the cash from that liquidated share. Cash in hand is better than claiming the equivalent capital loss.

[pan2]

I think maybe I wasn't clear. When I say that the fractional share was liquidated, I mean that it was sold at market price and the proceeds credited to my account. So I certainly received the cash, it's just an issue of tax liability, namely that the record should reflect that that dividend was associated with some non-zero cost basis.

[sweeps]

Ok. Definitely a capital gain or loss. Example