You receive a stock dividend when a company pays you a dividend with additional shares of stock instead of cash. You usually don’t need to include these dividends in your taxable income.
When you receive a dividend, the total value (basis) of the stock doesn't change. Instead, the basis of each share changes.
Ex: Joanne bought 9 shares of stock in a company for $10 per share. So, the total basis of her shares is $90 (9 x $10). The company later paid a stock dividend of 1 share for every 3 shares owned. So, Joanne received 3 additional shares of stock and now owns 12 shares.
After receiving the stock dividend, Joanne’s total basis of her stock is still $90 since she didn't pay for the additional 3 shares. However, her basis in each share is now $7.50:
$90 (total value of shares) / 12 (shares owned) = $7.50 (basis in each share)
If you receive a fractional share (Ex: 1 / 2 share) as part of the stock dividend, you might get cash for that share. Since many companies don't want the administrative burden of maintaining fractional shares, they'll immediately sell the fractional share and send you a check.
Ex: Dean bought 10 shares of stock in a company for $10 per share. His total basis is $100 (10 x $10). The company later paid a stock dividend of 1 share for every 3 shares owned. The company paid Dean with 3 full shares and a check for $2 for the fractional share.
Dean’s total basis is now $102 -- the total basis of the stock ($100) plus the cash ($2).The basis of the fractional share is $1.96:
$100 (total basis before dividend) x $2 (amount received for fractional share) / $102 (total basis after dividend) = $1.96
Although stock dividends usually don’t have tax implications until you sell the shares, the amount paid in cash for the fractional share is considered taxable income. Report the sale of fractional shares on Form 8949.