The Warner Bros. Studios in Burbank, Calif. AT&T shareholders have received a 0.242 share of Warner Bros. Discovery for each AT&T share. Photographer: Bing Guan/Bloomberg
holders who choose to sell shares of
The good news is that while AT&T (ticker: T) holders received the Warner Bros. Discovery (WBD) stock on Friday, their holding period for tax purposes is the date of the purchase of the AT&T stock, according to New York tax expert Robert Willens.
This means that sales of Warner Bros. stock would qualify for long-term capital gains treatment if the AT&T stock were held for at least a year.
The spinoff of the Warner Bros. Discovery stock is tax-free to AT&T holders. It is only when investors sell either their AT&T or Warner Bros. stock that taxes could be due.
In midday trading on Monday, AT&T stock was up 7.6%, at $19.66, adjusted for the value of the Warner Bros Discovery stock received by AT&T holders, who got a 0.242 share of Warner Bros.
Warner Bros Discovery, formerly Discovery, was down 2.5%, at $23.81.
Given that AT&T stock is near a 10-year low, many investors who sell either AT&T or Warner Bros. soon will take a loss for tax purposes.
The cost basis for tax purposes should be based on the value of AT&T and Discovery stock on Friday. AT&T finished at $24.14 and Discovery at $24.43. The initial value of the Warner Bros. Discovery stock received for each AT&T share was roughly $5.90 (0.242 times $24.43), or 25% of the value of AT&T stock on Friday. That means an investor would allocate roughly 75% of his or her cost to AT&T and 25% to Warner Bros. Discovery.
An investor who paid $32 for AT&T stock a year ago would have a cost basis of about $24 a share in AT&T (75% of $32) and about $8 for Warner Bros. Discovery (25% of $32). The effective cost basis in Warner Bros. Discovery stock would be $32 a share—or $8 divided by 0.25.
It gets complicated if an investor has purchased AT&T in multiple transactions.
“If you own several blocks of T stock, you have to make this computation on a block-by-block basis,” Willens told Barron’s in an email. “You can’t simply aggregate the blocks of stock you own. Instead, each block of T stock is considered separate from any other blocks you might own.”
This means that investors who bought equal amounts of AT&T at $30 and $24 can’t use an average price of $27 for their cost basis.
Investors can pick which block of stock they want to use when they sell any AT&T or Warner Bros. Discovery stock.
“Sure, you can choose which block of stock to sell,” Willens wrote. “You just have to specify to your broker which block of stock you wish to sell, and the broker is then required to confirm the choice you made in a written document given to the client within a reasonable time after such specification is made. Such specification can be confirmed by the broker on the client’s monthly statement, for example. That is called ‘specific identification’ and it is respected for tax purposes even though stock from a different block is actually transferred to the purchase.”
Investors probably should consult their own tax advisors on the matter given the complexity.
Write to Andrew Bary at firstname.lastname@example.org