Question

Greller owns 100 shares of Arden Corp., a publicly traded company, which Greller purchased on January 1, Year 1, for $10,000. On January 1, Year 3, Arden declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 share. Immediately following the split, the FMV of Arden stock was $62 per share. On February 1, Year 3, Greller had his broker specifically sell the 100 shares of Arden stock received in the split when the FMV of the stock was $65 per share. What is the basis of the 100 shares of stock Arden sold?

A. $6,500
B. $6,000
C. $5,000
D. $6,200

Answer 1

The answer is: $5,000

Step-by-step explanation:

Greller first bought 100 stocks at $100 each ($10,000 in total).

Then the stock split in two, so Greller now had 200 stocks with a basis of $50 each.

If then Greller sold 100 stocks, the total basis for the sell is $5,000.

Any amount above $5,000 will be considered as capital gains by the IRS. So Greller should report the $1,500 he earned.