The tax treatment of a tender offer depends on who is buying your shares. If a third party is acquiring the company and offering to buy your stock, the payout is a straightforward stock sale taxed as a capital gain or loss. If the issuing corporation is buying back its own shares, the IRS runs the transaction through a series of ownership-reduction tests under Section 302 of the Internal Revenue Code to decide whether you get sale treatment or dividend treatment. The difference can add up to thousands of dollars on the same dollar amount of proceeds.
Third-Party Offer or Issuer Buyback
Start by identifying who is on the other side of the transaction. An outside company making a tender offer as part of an acquisition is buying your shares, and that is a sale. You subtract your adjusted basis from the cash you receive and report the difference as a capital gain or loss. Section 302’s recharacterization rules do not apply, because no one is redeeming stock on behalf of the issuer.
Section 302 kicks in only when “a corporation redeems its stock,” meaning the company whose shares you own is buying them back, directly or through an intermediary acting for it.1Office of the Law Revision Counsel. 26 U.S. Code 302 – Distributions in Redemption of Stock Self-tenders, share buybacks, and other corporate redemptions all trigger the sale-or-dividend analysis. Third-party offers do not.
Calculating the Gain First
The arithmetic is the same either way. Take the total cash received, subtract your adjusted basis in the shares you surrendered, and that is your realized gain. Adjusted basis is usually your original purchase price, increased by any reinvested dividends already taxed and decreased by any nontaxable return-of-capital distributions.
Say you received $50 per share and your basis is $30. The realized gain is $20 per share. What happens next depends on characterization: sale treatment taxes only that $20, while dividend treatment can tax the full $50.
Why Sale Treatment Beats Dividend Treatment
Under sale treatment, tax applies only to the gain. Long-term capital gains on shares held more than a year are taxed at 0%, 15%, or 20% depending on income.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses For 2026, the 20% rate begins at taxable income above $545,500 for single filers and $613,700 for joint filers.3Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
When Section 302 is failed, the payout falls under Section 301 and is applied in three tiers. The portion covered by the corporation’s current and accumulated earnings and profits (E&P) is a dividend. Any amount beyond E&P reduces your stock basis tax-free. Anything left after basis reaches zero is capital gain.4Office of the Law Revision Counsel. 26 U.S.C. 301 – Distributions of Property The disadvantage is that basis does not offset the dividend portion. If the corporation has ample E&P, almost the entire payout is dividend income rather than just the gain above cost.
An example makes the point. You tender 100 shares with a basis of $3,000 and receive $5,000. Under sale treatment, tax applies to the $2,000 gain. Under dividend treatment with sufficient E&P, tax applies to the full $5,000. Your $3,000 basis shifts to any remaining shares you hold rather than reducing your current tax bill. Being taxed on $5,000 instead of $2,000 is where dividend treatment really hurts.
The rate blow is softer than it once was. Dividends from domestic corporations generally qualify for the same 0%/15%/20% rates as long-term capital gains if you meet the holding-period requirement.5Legal Information Institute. 26 U.S.C. 1(h)(11) – Dividends Taxed as Net Capital Gain Most shareholders with any meaningful holding period will meet it. The real cost of dividend treatment is losing the basis offset, not the rate.
The Three Section 302 Tests
A self-tender qualifies as a sale only if it passes one of three tests under Section 302(b). Fail all three, and the distribution defaults to Section 301 dividend treatment.1Office of the Law Revision Counsel. 26 U.S. Code 302 – Distributions in Redemption of Stock Each test requires constructive ownership calculations, meaning shares held by certain family members and related entities count as yours.
Substantially Disproportionate Redemption
This is the most mechanical test, and the safest to rely on because it involves math with no judgment calls. All three conditions must hold after the tender closes:
- You must own less than 50% of the corporation’s total voting power after the redemption.
- Your percentage of voting stock after the redemption must be less than 80% of what it was before. If you held 10% of voting shares going in, you need to hold less than 8% coming out.
- The same 80% reduction must occur in your percentage of all common stock, voting and nonvoting combined.
Missing any single condition disqualifies you. Every percentage runs through the constructive ownership rules, so shares held by a spouse, child, grandchild, or parent count toward your total.
Complete Termination of Interest
Surrender every share you own, voting and nonvoting, and the redemption qualifies as a complete termination. The test looks simple until constructive ownership enters. If your spouse or child still owns shares in the same corporation, those are attributed to you, and your interest is not fully terminated.
A family attribution waiver is available. You can elect to ignore shares attributed from family members if you hold no interest in the corporation as an officer, director, or employee after the redemption; agree not to acquire any interest for ten years, other than by inheritance; and file a written agreement with the IRS promising to notify it of any prohibited reacquisition.1Office of the Law Revision Counsel. 26 U.S. Code 302 – Distributions in Redemption of Stock Violating the terms inside that ten-year window can retroactively recharacterize the entire transaction as a dividend.
Not Essentially Equivalent to a Dividend
When the first two tests fail, this catch-all is your last chance at sale treatment. It requires a “meaningful reduction” in your proportionate interest, judged on the facts and circumstances of your case. In United States v. Davis, the Supreme Court held that the constructive ownership rules apply here as well, and that any redemption failing to change the shareholder’s proportionate interest is always essentially equivalent to a dividend.6Justia. United States v. Davis, 397 U.S. 301 (1970)
Courts look at whether the redemption reduced your voting rights, your share of future dividends, and your claim on assets in a liquidation. A minority shareholder who drops from 3% to 1.5% has a better argument than a controlling shareholder whose percentage barely moves. There is no bright-line safe harbor here, so relying on this provision means being ready to document ownership percentages before and after and to defend the position if the IRS questions it.
Constructive Ownership Can Flip the Outcome
Section 318 attributes to you shares held by related parties, and every Section 302 test uses those attributed numbers.7Office of the Law Revision Counsel. 26 U.S. Code 318 – Constructive Ownership of Stock The rules exist to stop shareholders from parking stock with relatives or affiliates to fake an ownership reduction. They fall into four categories.
Family attribution treats you as owning shares held by your spouse, children, grandchildren, and parents. Siblings and grandparents are not on the list. If you tender every share you personally hold but your adult child still owns stock in the same corporation, those shares are yours for Section 302 purposes.
Entity attribution runs in both directions. Shares owned by a partnership or estate are attributed proportionately to partners and beneficiaries. Shares owned by a trust are attributed to beneficiaries based on actuarial interest. The reverse also applies: your individually owned shares are attributed back to partnerships and estates in which you participate.
Corporate attribution activates when you own 50% or more of a corporation by value. At that point, you are deemed to own a proportionate share of the stock that corporation holds in other companies, and the corporation is treated as owning all stock held by any 50%-or-more shareholder.
Option attribution treats you as owning any stock you have an option to purchase, exercisable or not. Warrants, convertible securities, and employee stock options all count.
Before concluding which Section 302 test applies, map every family member’s holdings, every entity you have an interest in, and every option or warrant outstanding. Missing a single attribution path can flip the whole transaction from sale to dividend.
The 3.8% Net Investment Income Tax
Whether the payout is capital gain or dividend, high-income shareholders face an additional 3.8% net investment income tax under Section 1411. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 for single filers, $250,000 for joint filers, or $125,000 for married filing separately.8Office of the Law Revision Counsel. 26 U.S.C. 1411 – Imposition of Tax Those thresholds are not indexed for inflation, so they catch more filers each year.
Net investment income covers capital gains, dividends, interest, rents, and royalties. A large tender payout can push you above the threshold in a single year even if your income is usually below the line. The surcharge applies on top of the regular capital gains or dividend rate.
Reporting the Transaction
You will generally receive a Form 1099-B from the paying agent or broker reporting the gross proceeds.9Internal Revenue Service. Instructions for Form 1099-B That form often does not correctly classify the payment as sale proceeds versus a distribution, and it may not carry the right cost basis. Getting the characterization right is on you.
If the transaction qualifies as a sale under Section 302, report the gain or loss on Form 8949 and carry the totals to Schedule D.10Internal Revenue Service. Instructions for Form 8949 If the 1099-B reports a different characterization than the one you believe is correct, override it in the adjustment columns on Form 8949 and attach a statement showing which Section 302 test the redemption meets and your ownership percentages before and after.
If the Section 302 tests fail and the payout is treated as a dividend, report the dividend portion on Schedule B when it exceeds $1,500.11Internal Revenue Service. Topic No. 404, Dividends and Other Corporate Distributions The portion beyond E&P that reduces basis is not separately reported as income, and any excess beyond basis goes on Schedule D as capital gain. Because the 1099-B may lump everything together as sale proceeds, allocating these pieces correctly sometimes requires E&P information from the corporation that is not available until well after the tender closes.