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. Recognized gain follows the §356 boot rule — the lesser of the cash (boot) received or the total realized gain — and the new acquirer shares take a substituted basis under §358 equal to the old target basis minus the boot received plus the gain recognized. 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). Realized gain: $5,000 − $3,000 = $2,000; boot (cash) received: $2,500. Under §356, recognized gain is the lesser of boot or realized gain = min($2,500, $2,000) = $2,000 (LT if Target was held >1yr). New 50 Acquirer shares take a §358 substituted basis = $3,000 − $2,500 boot + $2,000 gain = $2,500 ($50/sh), inheriting Target's holding period.