Form 8937 Instructions for Adjusting Your Stock Basis

Form 8937, Report of Organizational Actions Affecting Basis of Securities, is a document corporations provide to report actions that change a shareholder’s cost basis in a security. The corporation, or issuer, is responsible for creating and distributing this form. Shareholders use the information to adjust the tax basis of their holdings, which is required for calculating taxes when they sell the securities.

Corporate Filing Requirements for Form 8937

A corporation must report information when it undertakes an “organizational action” that affects the basis of its securities. Such actions can include:

• Non-taxable cash distributions
• Stock splits
• Mergers
• Acquisitions
• Recapitalizations

A cash distribution classified as a “return of capital” instead of a taxable dividend is a common trigger for this form, as it reduces a shareholder’s investment and lowers their cost basis. The corporation must report this information by the earlier of the 45th day after the organizational action or January 15 of the following year.

A corporation can satisfy its reporting requirement by either filing Form 8937 with the IRS and providing a copy to shareholders, or by posting the form on its public website. If a corporation posts the form online by the deadline, it does not have to file it with the IRS or send it to shareholders. The posted form must remain accessible on the company’s website, often in the investor relations section, for 10 years.

Understanding the Information on Form 8937

Form 8937 is divided into two main parts. Part I contains the issuing corporation’s identification details, such as its name, Employer Identification Number (EIN), and contact information.

Part II details the specifics of the organizational action. Line 14 asks for a description of the event, such as a stock split or a special distribution.

Line 15, “Describe the quantitative effect of the organizational action on the basis of the security,” explains precisely how to adjust the basis, either as a specific dollar amount per share or as a percentage of the old basis. For example, the form might state that for a $1.00 per share cash distribution, $0.15 is a non-taxable return of capital, meaning the shareholder must reduce their basis by $0.15 for every share owned. Line 16 provides further detail on the calculation, including data like fair market values and valuation dates used to determine the adjustment.

How Shareholders Use Form 8937 Information

A shareholder’s responsibility is to use the data from Form 8937 to update their personal financial records; the shareholder does not file the form with the IRS. The information is used to adjust the cost basis of the specific security affected by the corporate action, and maintaining an accurate record of this adjusted basis is the shareholder’s duty.

For example, consider a return of capital distribution. If a shareholder originally purchased 100 shares of a stock for $50 per share, their initial total basis is $5,000. If the corporation issues a Form 8937 indicating a non-taxable return of capital of $2 per share, the shareholder must reduce their total basis by $200 (100 shares x $2/share), resulting in a new adjusted basis of $4,800, or $48 per share.

Another common event is a stock split. If a shareholder owns 100 shares with a total basis of $5,000 and the company announces a 2-for-1 stock split, the shareholder will own 200 shares after the split. Their total basis remains $5,000, but the per-share basis is halved to $25 ($5,000 / 200 shares) to reflect the change in the number of shares.

This adjusted basis is used when the shareholder sells the security. An accurate calculation of capital gains or losses, which is reported on Form 8949, Sales and Other Dispositions of Capital Assets, and summarized on Schedule D (Form 1040), depends on the correct basis. Using the original purchase price without accounting for these adjustments would lead to an incorrect calculation of the gain or loss, potentially resulting in an overpayment or underpayment of taxes.