Tax Topic 153: Cash in Lieu, Cost Basis, and 1099-B Reporting

Cash received in lieu of fractional shares is taxed as a capital gain or loss in almost every case: the IRS treats you as if you received the fractional share and immediately sold it, so you owe tax on the cash minus your allocated cost basis in that fraction. Report it on Form 8949 and Schedule D. The governing guidance is IRS Publication 550 and Revenue Ruling 66-365.¹

Why the Payment Is Taxable at All

Fractional shares appear whenever a corporate action doesn’t divide evenly into your holdings. A 3-for-2 split on 101 shares, a stock dividend, or a merger exchange ratio that produces half-shares all leave you with a fraction. Companies and brokers generally don’t want to carry fractional ownership, so they sell the piece on the open market and send you the proceeds.

Under Revenue Ruling 66-365, the IRS views this as though you received the fractional share and then surrendered it back for cash. The transaction is treated as a redemption of stock under Section 302 of the Internal Revenue Code.² For most shareholders that means a small capital gain or loss to report.

Capital Gain or Dividend?

The default is capital gain treatment. You subtract your basis in the fractional piece from the cash received, and the difference is your gain or loss.¹

Whether the gain is short-term or long-term depends on how long you held the original stock, not when the fractional share was created. If you bought the original shares more than a year before the corporate action, the gain qualifies as long-term.³ The fractional share’s holding period piggybacks on the original stock’s.

A narrower set of situations shifts the character. When cash in lieu arises from a corporate reorganization, the payment is technically “boot,” and Section 356 makes it taxable. If the distribution has the effect of a dividend rather than a stock buyback, it is taxed as dividend income up to your share of the corporation’s accumulated earnings and profits, with any remaining gain taxed as capital gain.⁴ This most often shows up in spin-offs and certain redemptions where your proportionate ownership doesn’t meaningfully change.

In practice you can tell which treatment the company chose by which form you receive. A Form 1099-B means sale (capital gain) treatment. A Form 1099-DIV means dividend treatment.⁵ Qualified dividends and long-term capital gains are taxed at the same 0%, 15%, or 20% rates, so the difference in tax often turns out to be small.

Figuring the Cost Basis of a Share You Never Held

The awkward part is assigning basis to a fractional share you never actually owned. Publication 550 sets the method: divide your total basis in the original stock by the total number of shares (whole plus fractional) produced by the corporate action to get a per-share basis, then multiply by the fractional amount.¹

A concrete example. You paid $1,000 for 100 shares. The company declares a 2-for-1 split, giving you 200 whole shares plus a 0.5 fractional share, for 200.5 total. Divide $1,000 by 200.5 to get a per-share basis of about $4.99. Multiply by 0.5 and your basis in the fractional piece is roughly $2.49. If the company paid you $5.50 in cash for the half-share, your taxable gain is $3.01.

If you bought your shares in multiple lots at different prices, run the calculation separately for each lot. Publication 550 illustrates this with an example of two shares purchased at $30 and $45: after a split, the per-share bases differ and you have to track them independently.¹

2026 Rates on the Gain

Long-term capital gains are taxed at 0%, 15%, or 20% depending on taxable income and filing status. For 2026, single filers pay 0% on gains up to $49,450 of taxable income, 15% between $49,451 and $545,500, and 20% above that. Joint filers move into the 15% bracket at $98,901 and the 20% bracket at $613,701. Higher earners may also owe the 3.8% net investment income tax on top.

Short-term gains, from stock held one year or less, are taxed at your ordinary income rate, which can run as high as 37%. Because most fractional share payments come from long-held positions, the lower long-term rates usually apply. Check your acquisition date to be sure.

If the payment ends up on a 1099-DIV as a qualified dividend, it is taxed at the same 0%/15%/20% structure.³

Reporting It on Your Return

Your broker reports the proceeds on Form 1099-B, usually delivered by mid-February. Enter the transaction on Form 8949: proceeds from the 1099-B in column (d), your calculated basis in column (e). The gain or loss flows to Schedule D.⁶

Use the right part of the form. Stock held one year or less goes in Part I (short-term). Stock held longer than one year goes in Part II (long-term). The holding period runs from the day after you originally acquired the stock, not from the corporate action.⁶

If the payment came on a 1099-DIV rather than a 1099-B, it goes on Schedule B or directly on your 1040, not on Form 8949. The form you receive controls the reporting path.

When the 1099-B Shows Zero or Blank Basis

This is where most people trip. Brokers frequently report the basis on fractional share sales as zero or blank, especially for shares acquired before brokers were required to track basis (generally pre-2011) or when the broker’s system didn’t handle the corporate action cleanly. The IRS instructions for Form 1099-B tell brokers to leave the basis box blank for noncovered securities and to enter zero only when the actual basis is zero.⁷

If your correct basis is higher than what the 1099-B shows, use adjustment code B in column (f) of Form 8949. Enter the reported basis in column (e), then put the correction in column (g) as a negative number in parentheses.⁸ That reduces your reported gain without contradicting the 1099-B.

Do not simply skip reporting the sale because the amount is small. The IRS receives a copy of every 1099-B, and its matching system will flag the omission. A CP2000 notice will follow, proposing tax as if the entire proceeds were gain.

Wash Sales, Withholding, and State Tax

If the fractional share sale produces a loss, the wash sale rule under Section 1091 can disallow it. You cannot deduct a loss if you buy substantially identical stock within 30 days before or after the sale, a 61-day window total.⁹ The rule has no minimum threshold. If a dividend reinvestment plan purchased shares of the same stock inside that window, even a $3 loss is disallowed. The disallowed amount is added to the basis of the replacement shares, so it isn’t lost, just deferred.

Backup withholding can also surprise you. If the broker doesn’t have a valid taxpayer identification number on file, or the IRS has notified the broker that you previously underreported income, 24% of the proceeds may be withheld.¹⁰ It’s a prepayment credited on your return, not an extra tax, but on a $10 payment it’s a jarring $2.40.

State tax matters too. Most states tax capital gains as ordinary income, with top rates ranging from zero in no-income-tax states to over 13% in the highest. A few states offer reduced rates or deductions for long-term gains, but most do not distinguish holding periods. The gain shows up on your state return as well, though on a fractional share the dollar impact is usually small.

1
Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
2
Internal Revenue Service. Private Letter Ruling PLR-111416-25
3
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
4
Office of the Law Revision Counsel. 26 USC Subchapter C – Corporate Distributions and Adjustments
5
Internal Revenue Service. Instructions for Form 1099-DIV (Rev. January 2024)
6
Internal Revenue Service. Instructions for Form 8949 (2025) – Section: Purpose of Form
7
Internal Revenue Service. Instructions for Form 1099-B (2026)
8
Internal Revenue Service. Form 8949 Codes – IRS Courseware – Link and Learn Taxes
9
Office of the Law Revision Counsel. 26 US Code 1091 – Loss From Wash Sales of Stock or Securities
10
Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide