Types

• There are two types of stock splits, a regular stock split and a reverse split. In a regular split the company gives owners a multiple of the number of shares they currently own. For instance, in the case of a 2-for-1 split, the owner of 100 shares would be given 100 additional shares and the price of each share would be cut in half. A reverse split would do the opposite, taking 100 shares and giving you 50 that are now worth twice the price.
  
  

Effects

• Stock splits are unusual transactions since the total equity you own doesn't change. It is simply an accounting transaction where the price of each share is adjusted based on the same ratio as the number of shares. For example, if you originally owned 100 shares at $50 for a total value of $5000 and it split 2-for-1 you would end up with 200 shares at $25. Your total value would still be $5000. In a reverse split if you owned 1000 shares at $1 each, they might split at 1-for-10 so you would end up with 100 shares at $10 each. Again, your start and end value are both $1000.
  
  

Taxation

• A taxable event is one where you actually lock in a gain or receive something of value and thus owe taxes. This could be because of dividends paid (which are actually just distributed earnings of the company) or capital gains, which are increases in the value of the company that have been locked in due to a sale of shares.
  
  

Significance

• The IRS says that a split (reverse or normal) does not increase or decrease your wealth nor do you own more or less of the company. Plus your overall cost basis hasn't changed. So splits and reverse splits are not taxable events and do not need to be reported until you sell the shares.
  
  

Considerations

• You will need to adjust your per share cost when you finally do sell your shares to account for the different number of shares. For instance, in the reverse split example, if you received 100 shares in exchange for your original 1000 shares, your total cost basis for the 100 shares is the same as it was for the original 1000 shares, but your per share cost has increased ten times. So when you finally sell your 100 shares you have to use your original total cost for the 1000 shares, but you divide it by 100 to get your actual per share cost.