Cost Basis: Exchange of Convertibles for Common Shares

What this video covers

• Why converting a convertible bond or convertible preferred stock into common shares is never a taxable event
• How the cost basis of the original security transfers in full to the new common shares, with no gain or loss recognized
• Why the holding period of the bond or preferred stock tacks on to the common shares immediately upon conversion
• How to calculate cost basis per share: total purchase price divided by shares received, not the conversion price
• The critical distinction between conversion price (sets share count based on par value) and purchase price (sets actual cost basis per share)
• How the identical tax logic applies to both convertible bonds and convertible preferred stock
• The most common exam trap: a question that mentions the $20 conversion price to bait you into selecting $20 as the cost basis per share