Cash in lieu of fractional shares is a type of payment where investors get cash instead of a fractional share or a partial share of a stock. Let’s break down what that could mean for your investments and how it can affect your taxes.
A financial advisor can help you create a financial plan for your investment needs and goals.
Why Investors Get Cash in Lieu of Fractional Shares
Cash in lieu of fractional shares refers to the money that investors can get for the sale of fractional shares after a company restructures with a a merger, acquisition, stock split or creation of a new company.
When these events happen, the newly adjusted stock can end up as fractional shares. And companies sometimes decide to sell these partial shares instead of holding on to them. Funds from the sale will then be used to pay investors who did not get those fractional shares.
A publicly traded company can determine how the value of its stock is maintained and how it is returned to investors. And cash in lieu is a common way to get rid of fractional shares and offer investors money that is comparable with the stock that they held before the restructuring.
Let’s take a closer look at the three common events that can trigger a cash payment in lieu of fractional shares:
Stock split. The board of a publicly traded company can decide that the share price of its stock is too high for new investors and therefore limit growth. When that happens, the company can use a stock split to lower share prices or opt to reverse a stock split when it needs to increase a share price. With either restructure, an investor could get fractional shares, unless the company decides to issue cash for an equivalent value.
Merger or acquisition. When a publicly-traded company gets acquired or merges, investors might receive fractional shares or stock if the math doesn’t work out evenly. And like with a stock split, if the board of the company chooses to sell those fractional shares, investors may end up getting a check in the mail.
Spin off. A publicly-traded company can create a new company by spinning off part of its business into a new entity. In this case, that new company would have its own separate stock. And when that happens, investors can get that new stock in fractional shares, which the board may choose to pay out in cash.
How Does Cash in Lieu of Fractional Shares Affect Taxes?
If you receive cash in lieu of payment that goes directly into your 401(k) or an individual retirement account, you won’t have to worry about reporting or paying taxes on those gains. But, if you get cash in the form of a check, you will need to report the payment to the IRS as capital gains. Some investors will also get the IRS tax form 1099-B at the end of the tax year with a note for cash in lieu or CIL.
When reporting your cash in lieu payment, you will need Form 1099-B, as well as:
- Original cost basis (which is the original price or cost of the asset at purchase)
- Purchase date
- Stock split date (or the date of the merger, acquisition or spin off)
- Reason why the cash in lieu of fractional shares was issued
Bottom Line
Cash in lieu of fractional shares is a type of payment that investors get for the sale of fractional shares. This tends to happen after a company restructures stock with a stock split, a merger or acquisition and a spin off. If you get a payment outside of a 401(k) or IRA plan, you will have to pay capital gains.
Tips for Investing
- A financial advisor can adjust your retirement plan to keep track of retirement goals. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know how much an investment can pay, SmartAsset’s free investment calculator can help you get an estimate.
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