Merger
A merger is a corporate action where one company acquires another. Shareholders of the target receive consideration — cash (cash merger, fully taxable as a deemed sale), stock of the acquirer (stock merger, generally non-taxable under §354 with basis carryover), or a mix (cash-and-stock merger, partial taxable event for the cash portion). Stock-merger ratios determine the post-merger share count and per-share basis.
Cash mergers are economically simple: target shareholders receive cash for their shares, recognize gain or loss based on cash received minus basis, and the holding terminates. The §1001 deemed-sale treatment applies; long-term gains preserve their LT character. Cash mergers are common in private-equity acquisitions of public companies (e.g., the Twitter/X going-private merger).
Stock mergers preserve continuity of ownership. Target shareholders receive acquirer shares at a specified exchange ratio (e.g., 1.5 acquirer shares per target share). Under §354 the receipt is non-taxable: the target's basis carries over to the new acquirer shares; the holding period also carries over. Pure stock mergers are common in same-industry consolidations (e.g., Sprint/T-Mobile, Disney/Fox stock components).
Cash-and-stock mergers are the most operationally complex. The total consideration per target share has both a cash component and a stock component; the cash portion is a deemed sale (taxable), the stock portion is a tax-deferred exchange. Basis allocates: total target basis × cash fraction = basis used against the cash deemed sale (producing gain/loss); total target basis × stock fraction = basis carried over to the new acquirer shares. The math is mechanical but easy to get wrong on partial sales of the post-merger position.
The issuer's Form 8937 (within 45 days of the merger) specifies the per-share cash and stock allocation, the exchange ratio, and the basis-carryover percentages. Reverse mergers — where a private company acquires a public shell — can produce taxable events for shareholders even though the legal form is a stock exchange. Regulatory and antitrust contingencies are common; the announced ratio at deal close may differ from the initially-announced ratio.
| Cash merger | Stock merger | Cash + stock | |
|---|---|---|---|
| Tax event | Yes — deemed sale | No — §354 carryover | Partial (cash portion) |
| Basis treatment | Used against cash | Carries to new shares | Allocated |
| Holding period | Terminates | Carries over | Carries over (stock) |
| Common context | PE buyouts | Industry consolidations | Mixed-consideration deals |
Synthetic long-tenure holdings should include merger-derived lots from various consideration types. The schema needs to track: pre-merger target lot, merger date, cash component (deemed sale entry), stock component (carryover lot), and exchange ratio. Cash-and-stock mergers exercise the most complex code paths and should appear with realistic frequency.
Common pitfalls
- Treating a cash-and-stock merger as fully non-taxable — the cash component is always a deemed sale.
- Failing to apply the exchange ratio to the new acquirer shares — fractional-share cashouts at non-clean ratios are common.
- Computing carryover basis incorrectly on the stock portion — basis allocation must follow the Form 8937 percentages.
- Missing the deemed dividend treatment on certain reverse mergers — some forms produce ordinary dividend income rather than capital gain/loss.
Examples
Holder owns 100 Target at $30 basis ($3,000 total). Target acquired by Acquirer for $50/share = $25 cash + 0.5 Acquirer shares (Acquirer at $50). Total consideration: $5,000 ($2,500 cash + 50 shares × $50 = $2,500 stock). Basis allocation: $3,000 × 50% = $1,500 against cash; $3,000 × 50% = $1,500 carryover to Acquirer shares. Cash deemed sale: $2,500 − $1,500 = $1,000 gain (LT if Target was held >1yr). New 50 Acquirer shares: $1,500 basis ($30/sh), inheriting Target's holding period.