How a Spin-Off Works for Shareholders: Shares, Dates and Cost Basis
A spin-off turns one holding into two. What the record date and distribution ratio mean, why the parent trades two ways for a few days, and how to split your cost basis.
In a spin-off, a company hands shares of a subsidiary to its own shareholders, who then own both companies. Holders on the record date get the new shares automatically at the distribution ratio, usually tax-free under section 355 of the tax code. The Form 10 and the parent’s Form 8937 hold the details.
Spin-offs differ from a sale of a division: no buyer pays cash, and shareholders keep exposure to both businesses. The process below follows SEC filings and IRS instructions, checked as of November 2026.
How does a spin-off work, step by step?
A spin-off follows a fixed sequence of filings and dates, each announced in advance.
- The parent announces the plan, and the new company files a Form 10 registration statement with the SEC, which includes an information statement describing the business, risks and the distribution.
- Once the Form 10 is effective, the parent’s board sets the record date, the distribution date and the distribution ratio.
- A few days before the distribution, the new stock begins “when-issued” trading, and the parent stock trades in two markets.
- On the distribution date, the transfer agent delivers the new shares to brokers and to registered holders.
- “Regular-way” trading in the new stock begins.
- The parent publishes Form 8937, which tells shareholders how to split their cost basis between the two stocks.
What do record date, when-issued and regular-way mean?
The record date decides who is entitled to the new shares, and the trading labels decide whether a share sold before the distribution carries that entitlement. The 3M spin-off of its health care business, Solventum, shows how the dates fit together. According to 3M’s March 8, 2024 announcement:
- Holders of 3M stock at the close of business on March 18, 2024, the record date, were entitled to one Solventum share for every four 3M shares.
- When-issued trading in Solventum was expected to start on or about March 26, 2024, under “SOLV WI.”
- From March 26 through March 28, 3M traded in two markets: “MMM,” regular-way, with the right to receive Solventum shares, and “MMM WI,” ex-distribution, without that right.
- Solventum began regular-way trading on the NYSE on the distribution date, April 1, 2024.
The practical point: a holder on the record date who sold 3M in the regular-way market before April 1 sold the right to the Solventum shares along with the 3M shares. 3M’s release told such holders to ask their broker how the sale would be treated. 3M distributed 80.1% of Solventum and kept 19.9%, and its 8-K reported the separation complete on April 1, 2024.
| Parent | Spun-off company | Record date | Distribution date | Ratio |
|---|---|---|---|---|
| 3M | Solventum (NYSE: SOLV) | March 18, 2024 | April 1, 2024 | 1 Solventum share for every 4 3M shares |
| General Electric | GE Vernova (NYSE: GEV) | March 19, 2024 | April 2, 2024 | 1 GE Vernova share for every 4 GE shares |
The GE Vernova terms are from the company’s Form 8-K reporting the completed distribution. To find these filings for any spin-off, our guide on how to read an 8-K covers the items to look for.
What happens to fractional shares in a spin-off?
Fractional shares are usually paid out in cash. With a one-for-four ratio, a holder of 10 parent shares is entitled to 2.5 new shares, so they receive 2 shares plus cash for the half share. The 3M release said shareholders would receive “cash in lieu of fractional shares.” Typically the transfer agent combines all the fractions, sells them in the market and pays each holder a share of the proceeds. That cash is generally treated as proceeds from selling the fraction, so it can create a small taxable gain or loss.
Is a spin-off taxable?
A spin-off that meets the requirements of section 355 is tax-free to shareholders: receiving the new shares does not create income. The requirements cover, among other things, the parent’s control of the subsidiary before the distribution, an active business in both companies, and a business purpose that is not mainly a way to pay out earnings. Parents usually describe the expected treatment in the information statement; 3M said the Solventum distribution was “generally intended to be tax-free.”
If a spin-off does not qualify, the value of the new shares is generally taxed like a distribution from the parent, much as a dividend would be. The information statement explains which treatment the company expects and the conditions behind it. For how taxes work in a cash or stock merger instead, see how mergers are taxed for shareholders.
How do you split your cost basis after a spin-off?
You split your original cost basis in the parent between the parent shares and the new shares, in proportion to their market values just after the distribution. The parent publishes the percentages on IRS Form 8937, the report of organizational actions affecting basis.
Under the Form 8937 instructions, the issuer must file the form by the 45th day after the action, or by January 15 of the following year if that comes first. It can skip filing with the IRS if it posts the signed form on its public website and keeps it there for 10 years, which is why most companies put it in the investor relations section.
A worked example with made-up percentages: you own 100 parent shares with a total basis of $10,000, and the ratio is one for four, so you receive 25 new shares. If the Form 8937 allocates 85% of basis to the parent and 15% to the new company, your parent shares keep $8,500 of basis and the 25 new shares take $1,500, or $60 each. Your broker usually makes this adjustment for shares it tracks, but it is worth checking the figures against the form.
Bottom line
Save two documents from any spin-off you receive: the brokerage statement for the month of the distribution and the parent’s Form 8937. Together they show how many shares you received, the cash paid for fractions and the basis split you will need when you sell either stock. Questions about your own tax return go to a tax professional.
FAQ
Do I need to do anything to receive spin-off shares?
Usually not. In the Solventum case, 3M said shareholders did not need to take any action, pay anything or surrender their 3M shares. The new shares appear in your brokerage account or with the transfer agent on the distribution date.
What if I bought the parent stock after the record date?
It depends on which market you bought in. Buying in the regular-way market before the distribution date generally carries the right to the new shares, while buying in the ex-distribution market does not.
What is the difference between a spin-off and a split-off?
In a spin-off, every shareholder receives new shares pro rata. In a split-off, shareholders choose whether to exchange some or all of their parent shares for shares of the subsidiary, usually through an exchange offer.
