If you notice more shares of Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) stock in your account later this year than you originally purchased, don't be alarmed. The internet behemoth just announced a 20-for-1 stock split in conjunction with its latest earnings report. This means that investors will receive 19 additional shares for every one share of Alphabet stock they own.
The extra shares of Alphabet's stock should arrive in your account in July if you qualify. Shares that are currently worth around $3,000 will be valued at approximately $150 per share after the split. Some investors love stock splits because the shares become more accessible. But you're probably wondering if the company's stock split will jack up your tax bill, too?
Below we will explore how a stock split works and what this could mean for your tax return.
How a stock split works
Google's parent company, Alphabet, is slated to give all shareholders of record as of July 1 additional shares of stock in their account. If you're not familiar with Google's classes of stock, it can be a bit mind boggling trying to process it all.
The company has the following three classes of stock:
Class A single vote common shares: These shares have been available to investors since Alphabet went public in 2004. They currently trade under ticker GOOGL.
Class B nonpublicly traded shares: These shares are controlled by insiders and come with 10 votes per share.
Class C nonvoting publicly traded shares: These shares were created in 2014 following an unconventional stock split. They have no voting rights and currently trade under ticker GOOG.
All three classes of Alphabet stock will be affected in the same way. If the stock split goes through as planned, qualified shareholders will receive additional shares in their account around July 15. However, this will not change the total value of the stock in your portfolio. Your current shares will just be divided into smaller shares, making the four-figure share price more accessible to a broader range of investors.
For instance, let's say you have one share of Alphabet stock that is worth $3,000 before the split. After a 20-for-1 stock split, you now own 20 shares of stock valued at $150 per share. The total value is still $3,000. Your original portion of the pie was just split into 20 different slices.
Should you worry about taxes?
You can move with ease knowing that Alphabet's stock split won't add another item to your to-do list. Since the total value of your stocks won't change, you don't have to rack your brain trying to understand more tax rules. You'll get additional shares in your account, but you won't have to worry about making any moves on your end.
Here's why. A stock split doesn't leave you with additional money in your pocket. Since your earnings won't change, Alphabet's stock split will not impact your taxable income for your U.S. federal tax return. A stock split, in itself, is not considered a taxable event. You'll just get the gift of more shares in your account.
Can you sell your additional shares?
Absolutely. But you should know what you're getting into before you sell your extra shares after a stock split. Anytime you sell stock for a profit, you can trigger capital gains taxes. You'll either be taxed at short-term or long-term capital gains tax rates. It all depends on how long you held your stock.
Let's say you've had a share of Alphabet stock for four months. This year, your one share of Alphabet stock turns into 20 shares. If you decide to sell five shares of stock for a profit, you'll be on the hook for short-term capital gain taxes since you held your stock for a year or less.
If you want the best tax rates, make sure you hold on to your stocks for over a year before selling. Here are the 2022 long-term capital gains tax rates you can unlock if you're patient.
For single filers with taxable income of…
For married joint filers with taxable income of…
For heads of households with taxable income of…
…this is the long-term capital gains rate
$0 to $41,675
$0 to $83,350
$0 to $55,800
$41,676 to $459,750
$83,351 to $517,200
$55,801 to $488,500
As stated earlier, you don't have to do anything before or after Alphabet's stock split. Your brokerage will make sure the details are ironed out so you can get the additional shares in your account.
If you decide to sell shares, you can prepare for tax time by adding the appropriate tax forms to your list. Other than that, the stock split won't be a big deal for your taxes. You'll just have the pleasure of waking up to more shares of the company's stock without buying any additional shares.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Charlene Rhinehart, CPA has no position in any of the stocks mentioned. The Motley Fool owns and recommends Alphabet (A shares). The Motley Fool recommends Alphabet (C shares). The Motley Fool has a disclosure policy.