Hi,
My company is being taken over by a larger company. As part of the merger my ESPP shares which I currently own are to be convertrd as follows. For each share in my company that I currently own I will be paid $6.25. I have 1044 shares so I'll be getting $6525. In addition each share I currently own will be converted into 0.35 of a share in the merged company, once the merger is completed. My question is how do I report the $6525? Is it taxed as income or capital gains?

Thanks.

As capital gain. your basis in the new stock is the same as your basis in the old oneWhen you receive cash in the deal, you NEED to report that amount to the IRS as a capital gain; The acquiring biz can pay cash outright for all the equity shares of your company, paying you a specified amount for each share. Or, it can provide its own shares to you according to a specified conversion ratio ; so, when a M&A is conducted, there are various ways the acquiring company can pay for the assets it will receive; aslongas you trade old biz shares for new through a M&A, the IRS does not look on the event as a taxable transaction. It doesn't matter whether the shares are preferred, common or private; nor does it matter whether the trade was voluntary on your part or if you voted for it. So,no capital gain or loss has to be reported.

How do I report the $6525 as a capital gain? What is my cost basis on the $6525.

To make it easier I'll give my details.

I have 1044 shares. When the merger is completed, I'll receive $6.25 cash per share, giving me $6525. My cost basis in acquiring the 1044 shares, which I bought in 5 separate lots as part of my company's ESPP, is about $25,000.

How do I report this?

Thanks.