Cash in lieu of shares is taxed as if you sold the fractional share: you owe capital gains tax on the difference between the payment and your cost basis in that fraction, and the holding period of your original shares carries over. The amount is usually small, but the calculation depends on what triggered the payment, and the cost basis your broker reports is often wrong.
How the IRS Treats the Payment
The core rule is simple. The IRS views a cash-in-lieu payment as though you received the fractional share and immediately sold it. You calculate a capital gain or loss by comparing the cash received against the portion of your cost basis allocated to that fraction. Because the fractional interest inherits the holding period of the shares that produced it, a fraction from stock you’ve owned for more than a year produces a long-term gain, and one from newer shares produces a short-term gain.1Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property
What changes with the type of corporate event is how you figure the basis and, in one situation, whether the gain is capped.
Reverse Splits and Other Recapitalizations
A reverse split is a recapitalization of the same company, so the cash-in-lieu payment is a straight sale of the fractional interest. You spread your total basis in the old shares across the new share count and assign a proportional slice to the fraction.
Say you paid $950 for 95 shares, and a 1-for-10 reverse split entitles you to 9.5 new shares. Your basis per new share is $100 ($950 ÷ 9.5). The 0.5 fraction carries $50 of basis. A $60 cash-in-lieu payment produces a $10 capital gain. Long-term if you’d held the original shares more than a year, short-term if not.
Mergers and Tax-Free Reorganizations
In a qualifying stock-for-stock reorganization, swapping target-company stock for acquirer stock is generally tax-free.2Office of the Law Revision Counsel. 26 USC 354 – Exchanges of Stock and Securities in Certain Reorganizations The cash-in-lieu payment, though, is “boot,” meaning extra consideration alongside the tax-free stock. Boot triggers gain recognition, but only up to the amount of cash received.3Office of the Law Revision Counsel. 26 USC 356 – Receipt of Additional Consideration
An example. You bought 100 shares of Company B for $5,000. Company A acquires B, and the exchange ratio entitles you to 176.75 shares of A. You receive 176 whole shares and a $52.50 cash-in-lieu payment for the 0.75 fraction. You allocate a proportionate slice of the $5,000 basis to the fraction: 0.75 ÷ 176.75 × $5,000, or about $21.24. Your capital gain is $31.26, and it’s capped at the $52.50 you received.
One narrow exception: if the payment has the economic effect of a dividend, it can be reclassified as dividend income. For ordinary fractional-share payments this almost never applies.3Office of the Law Revision Counsel. 26 USC 356 – Receipt of Additional Consideration
Stock Dividends
Most stock dividends are excluded from gross income when received, because they don’t change any shareholder’s proportionate interest.4Office of the Law Revision Counsel. 26 USC 305 – Distributions of Stock and Stock Rights When the fractional portion of a non-taxable stock dividend is paid out in cash, the IRS treats it as a sale of the fraction. The Treasury regulations specifically cover cash distributed to avoid the trouble and expense of issuing fractional shares.5eCFR. 26 CFR 13.10 – Distribution of Money in Lieu of Fractional Shares Your basis in the original shares is spread across the new whole shares and the fraction sold.
DRIP Fractions Work Differently
Dividend reinvestment plans follow a separate path because the underlying dividend is already taxable. When your cash dividend is reinvested, the full dividend amount is ordinary income whether it bought whole shares or a fraction.6Internal Revenue Service. Stocks (Options, Splits, Traders) 2 The basis of the shares bought through the DRIP equals the dividend income you reported. If a fractional piece is later paid out as cash in lieu, you calculate a separate capital gain or loss against that basis.
Each reinvestment creates its own tax lot with its own purchase date and price. Fifteen years of monthly reinvestments can produce dozens of tiny lots, so keep every DRIP statement. Reconstructing the history after the fact is painful.
Long-Term vs. Short-Term Rates
Long-term capital gains are taxed at 0%, 15%, or 20% depending on your total taxable income. For 2026, single filers pay 0% on long-term gains up to $49,450 in taxable income, 15% up to $545,500, and 20% above that. Short-term gains, from shares held one year or less, are taxed at ordinary income rates that can run as high as 37%.
Because holding period tacks from the surrendered shares, the fraction created by a merger or split almost always inherits long-term status if you’d owned the original stock more than a year.
Reporting on Your Tax Return
Your broker or the paying agent reports the cash-in-lieu proceeds on Form 1099-B, the same form used for any securities sale.7Internal Revenue Service. About Form 1099-B, Proceeds from Broker and Barter Exchange Transactions From there, the sale goes on Form 8949, and the totals flow into Schedule D.
Brokers are not required to file a 1099-B for fractional share sales when the gross proceeds are under $20.8Internal Revenue Service. Instructions for Form 1099-B (2026) Many brokers report the amount anyway. If yours doesn’t, you still owe tax on the gain and still need to report it. The absence of a form isn’t the absence of a tax obligation.
Fixing an Incorrect Cost Basis
This is where most people trip up. The 1099-B often shows the wrong basis for a fractional share, or shows none at all. Brokers frequently lack the original purchase records, particularly for shares acquired years ago, transferred in from another firm, or inherited. You are responsible for the correct number regardless of what the form says.
If the basis on the 1099-B is wrong and was reported to the IRS, enter the reported (incorrect) basis in column (e) of Form 8949, then use column (g) to enter an adjustment that produces the correct gain or loss. Put code “B” in column (f) to flag the correction.9Internal Revenue Service. Instructions for Form 8949 If the basis wasn’t reported to the IRS at all, enter the correct figure directly in column (e) with no adjustment needed.
Uncashed Checks and Unclaimed Property
Cash-in-lieu payments sometimes arrive as paper checks, especially if you hold stock directly with a transfer agent. Uncashed checks don’t sit forever. After a dormancy period that varies by state, typically three to five years and ranging from one to seven, the funds are turned over to the state as unclaimed property.
You can still recover escheated money by filing a claim with the state’s unclaimed property office, but the process takes time and no interest accrues while you wait. Cash any check promptly or make sure your brokerage receives the payment electronically. If a merger or reverse split should have produced a payment you never saw, the state’s unclaimed property database is a reasonable place to look.