Splits, sales and taxes

Q A stock I own split 3-for-1. How do I figure my taxable gain when I sell the shares? — L.L., Syracuse, New York

A Imagine that you bought 100 shares for $24 (initial cost: $2,400) and they were trading at $30 before the split, for a total value of $3,000. The split gives you three shares for each one you own, so postsplit, you’ll own 300 shares, worth a third as much ($10 each), for a total of $3,000. Not much has really changed.

For tax purposes, the “cost basis” of your purchase, which was $24 per share pre-split, is now a third of what it was: $8. But if you sell, your capital gain will be the same as it was pre-split. For example, selling now, your gain would be around $600: Your $3,000 in sale proceeds (less your brokerage commission cost) minus your $2,400 purchase price (plus your commission cost).

When a stock is split, dividends per share, earnings per share and other figures based on share count all get adjusted accordingly.

Q Is “buy and hold” the best way to invest? — H.M., online

A We prefer to think of it as buying to hold, because while you might aim to hang on forever, you should keep up with your holdings regularly. Hanging on as long as they remain healthy and growing, or selling if their prospects change.

Many investors have gotten rich holding shares of great companies for decades, through ups and downs, but you should never just buy a stock and then blindly hold it for years. Superinvestor Warren Buffett has said that his favorite time to sell is “never.” But that doesn’t mean he hasn’t sold stocks.