Cost Basis: Exchange of Convertibles for Common Shares

What this video covers

• Why converting a convertible bond or convertible preferred into common stock is not a taxable event, and when tax actually hits
• How the holding period of the convertible tacks onto the new common shares, so long-term status carries over from day one
• The cost basis per share formula: bond purchase price divided by shares received in the conversion
• Why a bond bought at a $900 discount converting 50:1 produces an $18 per share cost basis, not $20
• The key distinction between conversion price (sets share count from par) and cost basis per share (set by what the investor paid)
• How the identical rules apply to convertible preferred stock, since the Internal Revenue Service (IRS) treats conversion as a change in form, not a sale
• How premium-bought bonds produce a per share cost basis above the stated conversion price, and discount-bought bonds produce one below it