A mutual insurance company is owned by its policyholders and has no stock. When an insurance company demutualizes, a policyholder's ownership interest may be exchanged for stock or cash. The exchange does not cause the policies to change, except for the name. The policyholder's basis in the policy stays the same. The policyholder's basis in stock received is deemed to be zero. Refer to Revenue Ruling 71–233.

If the policyholder elected to receive cash instead of shares, the policyholder is treated as having received shares and then selling them for capital gain reportable on Form 1040, Schedule D (PDF), Capital Gains and Losses. If the policyholder that received the cash held the policy for more than one year as of the date of the demutualization, the gain is treated as long-term capital gain. If the policyholder owned the policy for a year or less, the gain is short-term capital gain. Refer to Internal Revenue Code Section 1223(1).

For information on how to report this gain, refer to Publication 550 (PDF), Investment Income and Expenses.

If you elected to receive the stock, you are not taxed on the shares until you sell or otherwise dispose of them. The holding period of the stock begins with the purchase of the policy and your starting basis is zero.

Copies of Revenue Rulings are available in one of the local Federal Depositary Libraries in your community. To find the library nearest to you, visit the Governmental Printing Office Locate Federal Depository Libraries website at http://www.gpo.gov/su_docs/.

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