Cash received in lieu of a fractional share is reported as a small stock sale on Form 8949 and Schedule D. The IRS treats the payment as though the fractional share was issued to you and immediately sold, so you calculate a capital gain or loss using a proportional slice of your original cost basis and the holding period of the underlying shares. That’s the tax reporting for cash in lieu of fractional shares in one sentence, and everything below is how to get the numbers right.
Why the Payment Is a Sale, Not Ordinary Income
When a reverse split, merger, or spin-off produces a fraction of a share, the paying agent bundles all the fractions from every shareholder, sells them on the market, and mails each investor a proportional share of the proceeds. The IRS treats that payment as a “deemed sale” of the fractional share you were entitled to.1Internal Revenue Service. Internal Revenue Bulletin: 2024-20 The result is a capital gain or loss, not ordinary income or a dividend, and it goes on Schedule D with the rest of your investment activity.
The amount is usually small. That doesn’t excuse you from reporting it. The 1099-B goes to the IRS whether or not you file one, and the automated matching system will notice.
Calculating Your Cost Basis in the Fractional Share
The basis of the fractional share is a proportional piece of the basis you had in the lot the fraction came from. Divide the size of the fraction by the total shares in the lot, then multiply by your total basis in that lot.
A worked example. You own 12 shares with a total basis of $600 (that’s $50 per share). A reverse split leaves you with a 0.4 fractional share that gets cashed out. The allocation is 0.4 ÷ 12 = 3.33%. Your basis in the fraction is 3.33% × $600 = $20.00. If the paying agent sends you $30.00, your capital gain is $10.00.
If you bought your shares in more than one lot at different prices, you have to decide which lot the fraction came from. Specific identification lets you pick — usually the highest-cost lot, to minimize the gain. If you don’t specifically identify, the default is first-in, first-out, which pulls the fraction from your oldest (and often cheapest) shares and produces a larger taxable gain.2Internal Revenue Service. Stocks (Options, Splits, Traders) 3
Don’t use a $0 basis just because the number isn’t handy. Zero basis means every dollar of the check is taxable. Before defaulting to zero, check old brokerage statements, transfer agent records, or the company’s Form 8937 for the corporate action.
Holding Period: Short-Term or Long-Term
The fractional share inherits the holding period of the underlying shares. Count from the day after you bought the original stock through the effective date of the corporate action. More than a year is long-term; a year or less is short-term.3Internal Revenue Service. Topic No. 409 – Capital Gains and Losses
This determines both the tax rate and which section of Form 8949 you’ll use. Long-term gains get the preferential 0%, 15%, or 20% rates based on your taxable income. Short-term gains are taxed at your ordinary income rate.
What the 1099-B Will Show, and Where It Goes Wrong
Your broker or the paying agent reports the transaction on Form 1099-B. Box 1d is the proceeds, Box 1b is the acquisition date, and Box 2 marks it short-term or long-term.4Internal Revenue Service. Instructions for Form 1099-B (2026)
The problem spot is Box 1e, the cost basis. For shares acquired after 2010 (2011 for mutual funds and DRIP shares), brokers are required to track basis, and those are “covered” securities.5Internal Revenue Service. Stocks (Options, Splits, Traders) But corporate actions often produce a 1099-B where Box 1e is blank, shows $0, or is marked as not reported to the IRS, especially if the shares are old or came in from another firm. It’s still your job to calculate and report the correct basis. The 1099-B is a starting point.
Check Box 12. If it’s checked, the broker reported basis to the IRS. That matters for the next step.
Filling Out Form 8949 and Schedule D
Reporting takes two forms. Form 8949 lists the transaction; Schedule D totals everything up.
On Form 8949, enter a description like “0.4 sh XYZ Corp cash in lieu,” the date acquired (your original purchase date), the date sold (the effective date shown on the 1099-B), the proceeds, and your calculated basis. Which section of the form you use depends on the holding period and whether basis was reported to the IRS:6Internal Revenue Service. Instructions for Form 8949 (2025)
- Box A (short-term) or Box D (long-term): basis was reported to the IRS and is correct.
- Box B (short-term) or Box E (long-term): basis was not reported to the IRS, or the 1099-B shows no basis. Enter the basis you calculated in column (e).
The Form 8949 totals then carry to Schedule D, which separates short-term from long-term and nets your gains against any losses from other trades.7Internal Revenue Service. Instructions for Schedule D (Form 1040)
When the Broker Reported the Wrong Basis
If Box 12 is checked (basis reported to the IRS) but the number is wrong, don’t just override it silently. Report the transaction under Box A or Box D, enter the broker’s reported basis in column (e), put adjustment Code B in column (f), and enter the correction in column (g).8Internal Revenue Service. 2025 Instructions for Form 8949 Using the earlier example, if the 1099-B shows $0 basis but your real basis is $20, you enter $0 in column (e), Code B in column (f), and a positive $20 in column (g).
The adjustment code is what tells the IRS why your gain is smaller than the 1099-B implies. Skip it and their matching system will expect tax on the full proceeds, which usually shows up as a CP2000 notice a year or two later.
DRIP Fractions
Dividend reinvestment plans generate fractional shares constantly, since each reinvested dividend buys shares at whatever the market price is that day. When you leave the plan or a corporate action hits, those accumulated fractions get cashed out and reported the same way.
Basis tracking is the harder part. DRIP shares acquired after 2011 are covered, so the broker should have records.5Internal Revenue Service. Stocks (Options, Splits, Traders) For DRIP shares from before 2012, brokers weren’t required to track basis and you’ll likely need to rebuild it from old statements.
Remember that the dividends were taxed as income in the year you received them, even though they went straight into more shares. The basis of each reinvested purchase is the dividend amount that bought it. Using $0 basis on those fractions taxes the same money twice.
Foreign Currency Payments
If the corporate action involves a foreign company and the check comes in a foreign currency, convert to U.S. dollars using the exchange rate on the date you received the payment. The same conversion applies to the basis if you bought the shares in a foreign currency to begin with.9Internal Revenue Service. Foreign Currency and Currency Exchange Rates
Net Investment Income Tax
Fractional-share gains count as net investment income. If your modified adjusted gross income exceeds $250,000 (married filing jointly), $200,000 (single), or $125,000 (married filing separately), the 3.8% Net Investment Income Tax applies to the lesser of your net investment income or the amount your MAGI exceeds the threshold.10Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax The thresholds are not indexed to inflation. A $10 fractional-share gain won’t push you over on its own, but it stacks with the rest of your investment income. Report NIIT on Form 8960.
What Happens If You Skip It
The IRS accuracy-related penalty is 20% of any underpayment from a substantial understatement, which for individuals means understating tax by the greater of 10% of the correct amount or $5,000.11Internal Revenue Service. Accuracy-Related Penalty One small fractional-share cash-out won’t hit that threshold alone, but stacked with other omissions it can. And the more common outcome is a CP2000 notice: the IRS receives the 1099-B, sees no matching entry on your return (or an entry that looks too small because you didn’t use an adjustment code), and proposes additional tax on the full proceeds. Reporting every 1099-B, calculating a real basis, and using Code B when the broker’s basis is wrong keeps that letter from arriving.