Cost Basis: Exchange of Convertibles for Common Shares

What this video covers

• Why conversion of a convertible bond or convertible preferred stock is never a taxable event, and what the IRS treats as a change in form rather than a sale
• How cost basis transfers directly from the converted security to the new common shares with no reset
• Why conversion price determines share count (based on par value) while actual purchase price determines cost basis per share
• How to calculate cost basis per share when a bond is bought at par, at a discount, and at a premium
• Why the holding period of the original security tacks on to the common shares received upon conversion
• Why convertible preferred stock follows the identical tax logic as convertible bonds, with no exam distinction between debt and equity conversions
• When tax consequences finally arise: only upon the eventual sale of the common shares, not at conversion