7510 / What is the tax basis of stock acquired in a stock dividend? When does the holding period of the stock begin?

If a shareholder acquires stock in a nontaxable stock dividend (see Q 7508), the shareholder’s present tax basis in the “old” stock, with respect to which the stock dividend was paid, is reallocated between the old and the new shares in proportion to the fair market values of each on the date of distribution (not the declaration or record date).¹ If the stock with respect to which the dividend was paid was purchased at different times and for different prices, the shareholder may not use the overall average basis for purposes of this allocation. If the shareholder can adequately identify the various purchases, he or she may allocate the proportionate amount of the dividend stock to each lot and, with respect to each lot separately, reallocate the tax basis between the “old” and “new” shares according to the fair market value of each. If the shareholder cannot adequately identify the stock in each lot, the dividend stock is matched to the “old” stock in the order in which the “old” stock was acquired (i.e., a FIFO tracing approach), and the tax basis of those “old” shares is reallocated between the old and new matched shares according to their fair market values.²