J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

30.7 Convertible Stocks and Bonds

You realize no gain or loss when you convert a bond into stock, or preferred stock into common stock of the same corporation, provided the conversion privilege was allowed by the bond or preferred stock certificate.

Holding period.

Stock acquired through the conversion of bonds or preferred stock takes the same holding period as the securities exchanged. However, where the new stock is acquired partly for cash and partly by tax-free exchange, each new share of stock has a split holding period. The portion of each new share allocable to the ownership of the converted bonds (or preferred stock) includes the holding period of the bonds (or preferred stock). The portion of the new stock allocable to the cash purchase takes a holding period beginning with the day after acquisition of the stock.

Basis.

Securities acquired through the conversion of bonds or preferred stock into common take the same basis as the securities exchanged. Where there is a partial cash payment, the basis of the portion of the stock attributable to the cash is the amount of cash paid; see Examples 1 and 2 below.

If you paid a premium for a convertible bond, you may not amortize the amount of the premium that is attributable to the conversion feature.

EXAMPLES

1. On January 5, you paid $100 for a bond of A Co. Your holding period for the bond begins on January 6 (5.9). The bond provides that the holder may receive one share of A Co. common stock upon surrender of the bond ...