Calculating Basis on a Stock Split

One of the more interesting side benefits of writing this blog and running the trust funds is that I take apart my brokerage statements in detail.  Recently, eBay split into two stocks as they spun out PayPal into a separate company.  Portfolio One owns 50 shares of eBay, which became 50 shares of eBay and 50 shares of PayPal.

50 eBay shares were purchased in December 2007 at a price of $33.50 a share or a total of $1675.  This is the “cost basis” or “tax basis” of the stock.  Regardless of how many times eBay and PayPal subsequently split or spin off, the total of the basis is $1675 and can’t go higher or lower.

Today, unlike when I started this blog, you can find pretty much anything out on the internet.  So I just typed in “eBay Paypal spin off stock price basis” and found this link.  In the link they said that the split percentage was calculated based on the market price of PayPal and eBay after the stock was launched… which was .5682 as PayPal and .4138 as eBay.  .5682 + .4138 = 1 as it must since the basis must be split between the two stocks.

As a result of this, eBay’s 50 shares must be worth .4138 * $1675 = $693.12 or ($693.12 / 50) $13.86 a share.

PayPal’s 50 shares must be worth .5682 * $1675 = $951.73 or ($951.73 / 50) $19.03 a share.

For fun, I went to my site’s brokerage account where they calculate the cost basis for taxes and they had different numbers.. eBay was $761.86 and PayPal was $927.14.  This totals $1689.

The difference between the $1689 – $1675 = $14.  That’s probably the commission we paid back in 2007 (when we weren’t getting free trades).  That makes sense, then.  Thus my “total” basis is $1689 to split between the two stocks.

I’m not certain what the difference is between the calculation I found on the internet and the brokerage calculation.  They are close enough, though.  This shows the complexity of the process – it would be much worse if I had bought eBay at many other price points over the years, and / or if it had split a bunch of times.

Well… I dug around a bit more and went to eBay’s investor relations site.  They had a document there from their head of tax describing one way to split the basis between the two stocks.  Here is a link to that document.

In that document eBay said the following:

Based on that approach and the assumptions and calculations set forth in Item 16 below, 39.2706% of an eBay stockholder’s aggregate tax basis in his or her shares of eBay common stock immediately prior to the Distribution would be allocated to such stockholder’s shares of eBay common stock and 60.7294% would be allocated to such stockholder’s shares of PayPal common stock received in the Distribution.

So if I plug in the $1689 ($1675 + $14) basis times .392706 I get $663.28 for eBay and $1025.71 for PayPal.  Aargh that doesn’t tie out either.  I think I might send an email to the support section of the brokerage account to ask.  Probably I am spending far more time on this than it is worth but since I am down the rabbit hole…

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5 thoughts on “Calculating Basis on a Stock Split”

  1. Thanks for the article, and its nice to see Im not the only one who struggled to really quantify the PayPal/Ebay Split.

    I use investment software to track my portfolio, and so I kept the cost basis of Ebay the same, and did a ‘Transfer In’ of the PayPal shares, with zero cost. Clearly this isn’t accurate, as Ebay now show a huge net loss, with PayPal appearing to come from nowhere as a freebie.

    I wonder if you ever reached a firm conclusion on how to model the real cost of the PayPal shares?

    Thanks, and Happy New Year!

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    1. I did not reach a firm solution but my brokerage has a “cost basis” feature and they had a number not too far from the number in the calculation and in the end it is their number that matters for tax basis purposes not mine. Try to contact your brokerage and see what they assigned as a tax basis to these shares is my suggestion. They must have a methodology for this.

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      1. Ok, I’ll try calling my broker as you suggest. Their website is pretty good normally, but even that is showing Paypal with a cost basis of 0 and Ebay as a net loss due to the spin off. Thanks for the advice, and Happy New Year!

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  2. I think the problem is that your initial values are incorrect. .5682 + .4138 !=1
    The actual split is 0.607294 for paypal and 0.392706 for ebay. Plug that in and see if it helps

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