Dealing with a payment for fractional shares can be tricky.
Most taxpayers deal with Schedule D when they sell some of their investment holdings. Yet in some situations, you might end up dealing with Schedule D even when you didn't make any investment sales at all. One example involves receiving cash in lieu of fractional shares as part of a merger or spinoff, and reporting that cash correctly can be harder than you might think.
A common situation for cash in lieu
Cash in lieu of fractional shares comes up most frequently when you own stock in a company that goes through a major transformative event. In merger situations, shareholders in the target company often receive shares of the acquiring company in exchange for their existing holdings, and it's rare for the ratio of new shares received to be a round number. Similarly, if a company spins off part of its business as a separately traded stock, shareholders might receive a certain number of shares of the spun-off entity for every share of the existing company they own.
Most companies and brokers don't like handling fractional shares, so if the math works out unevenly, they'll typically just take whatever fraction of a share you would have received under the formula, and essentially sell it automatically, paying you the resulting cash. This cash gets reported on a 1099 form as cash in lieu of fractional shares, and like any sale, you have to account for it on Schedule D.
The hassle of cash in lieu
Unfortunately, many brokers don't do a good job of giving you information about cash in lieu transactions. Technically, you'll have cost basis in whatever fractional shares produced the cash in lieu, and so you won't owe taxes on the full amount of the cash you received. You'll report both the cash and the basis on Schedule D, noting the sale of whatever fractional share resulted from the transaction.
The problem is that the necessary basis information usually isn't available until after the transaction goes through. Therefore, you'll often have to look it up yourself, and correct mistaken information on a 1099.
Also, keep in mind that if you allocate cost basis to the fractional shares, you'll have to reduce your remaining cost basis in the shares you continue to own. Typically, the dollar figures are fairly small, but any disparity in what you report versus what your broker reports could trigger warning flags that the IRS can pick up.
Cash in lieu of fractional shares is generally a nuisance, with the small amounts involved causing more trouble than they're arguably worth. Nevertheless, treating cash in lieu correctly on Schedule D can prevent a much bigger IRS problem down the road.
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FAQs
Technically, you'll have cost basis in whatever fractional shares produced the cash in lieu, and so you won't owe taxes on the full amount of the cash you received. You'll report both the cash and the basis on Schedule D, noting the sale of whatever fractional share resulted from the transaction.
How to report cash in lieu on Schedule D? ›
Report this transaction on Form 8949. Enter your gain or loss, the difference between the cash you receive and the basis of the fractional shares sold, in column (h) of Schedule D (Form 1040) in Part I or Part II, whichever is appropriate."
Is cash in lieu considered a dividend? ›
Is cash in lieu a dividend? Investors can receive cash in lieu of fractional shares for a dividend payment. However, cash in lieu is not a dividend and is not taxed like a dividend.
Can you do cash in lieu without a 1099 B? ›
Yes, even though it is a small amount, you should report it. Because it is cash in lieu of a fractional share, you need to determine your basis in that fractional share and when you know the basis, you will know whether you have a gain or loss from that fractional share.
How is cash in lieu taxed? ›
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.
Is cash in lieu income? ›
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.
What is an example of cash in lieu? ›
A company you invested in might send you a check instead of crediting a fractional share to your stock account. You might also receive a Form 1099-B at the end of the year with the description of “cash in lieu.”This is for the cash (the check) you received in place of receiving a fractional share.
How do I report payments in lieu of dividends? ›
Substitute payments in lieu of dividends or interest (box 8): Per the IRS instructions, "Shows substitute payments in lieu of dividends or tax-exempt interest received by your broker on your behalf as a result of a loan of your securities. Report on the Other income line of Form 1040."
How are substitute payments in lieu of dividends reported? ›
If an investor receives payment instead of dividends from eligible dividends, this payment is not eligible for tax, and the investor must pay the highest standard tax rate. The broker will issue a 1099-MISC form that lists the payment, rather than the dividends for the investor.
What is cash in lieu on pay stub? ›
A common practice for many public entities is to offer employees an opt-out payment for declining an offer of health insurance coverage. These payments are commonly referred to as a “Cash In Lieu” option.
Reporting cash income
All you'll need to do is include it when you fill out your Schedule C, which shows your business income and business expenses (and, as a result, your net income from self-employment). To report your cash income, just include it with your "gross receipts" on line 1 of the form.
Is cash in lieu short term or long term? ›
"Cash in lieu" transactions usually occur when there is a merger or acquisition that results in partial shares that are paid in cash. You should use $0.00 as your cost basis for this and indicate it is a short term transaction not reported to the IRS - "Box C - Short Term Not Reported".
Do all 1099-B have to be reported? ›
If you sold stock, bonds or other securities through a broker or had a barter exchange transaction (exchanged property or services rather than paying cash), you will likely receive a Form 1099-B. Regardless of whether you had a gain, loss, or broke even, you must report these transactions on your tax return.
Is cash on hand taxed? ›
Regardless of how you're paid, whether direct deposit or cash, all income is taxable, and it's your responsibility to report it accurately. This includes social security and Medicare taxes, along with income tax.
Are cash value withdrawals taxable? ›
Cash-value withdrawals are not always tax-free. If, for example, you take a withdrawal during the first 15 years of the policy—and the withdrawal causes a reduction in the policy's death benefit—some or all of the withdrawn cash could be subject to taxation.
What does it mean cost basis not reported to IRS? ›
Noncovered cost basis means that your brokerage firm is NOT responsible for reporting cost basis information to the IRS and will only report the sales information. For noncovered securities, you are responsible for reporting cost basis information to the IRS when you file your taxes.
Where do I report substitute payments in lieu of dividends or interest on 1040? ›
Generally, any income from your sale of these products is shown on Schedule C. Box 8: Shows substitute payments in lieu of dividends or tax-exempt interest received by your broker on your behalf as a result of a loan of your securities. This amount is shown on the line labeled "Other income" of Form 1040.
How do I report cash paid to employees? ›
To report instances of cash wages paid “under the table,” please call 1‑800‑528‑1783. You do not have to provide your name if you wish to remain anonymous. “Under the table” means paying wages to employees by cash, check, or other compensation with the intent to evade paying payroll taxes. associated with payroll.
What should I report on Schedule D? ›
Schedule D: Capital Gains and Losses is required when a taxpayer reports capital gains or losses from investments or the result of a business venture or partnership. Schedule D is used for reporting short-term and long-term gains or losses.
How do I report cash as income? ›
The solution here is to just record and report your cash income to the IRS yourself, generally using Schedule C on your Form 1040 (individual tax return). That way, you have done your part, and you should be protected when the IRS comes knocking.
