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T-Mobile’s plan to give away free stock could create a tax headache for millions of first-time investors

(Diane Bondareff/AP Images for T-Mobile)
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T-Mobile wants its customers to have a stake in the company’s future — literally. So it’s offering existing subscribers a free share of its stock and additional shares to any customer, new or old, who draws fresh converts from competing wireless networks.

The decision — which is unusual even for a company accustomed to defying industry norms — could effectively turn many of T-Mobile’s tens of millions of subscribers into first-time investors. It may also complicate their tax bills and increase what they must pay for tax preparation, according to analysts and tax attorneys, potentially creating a headache for consumers who decide to take advantage of the benefit.

Compared with the rest of the industry, T-Mobile’s customer base trends much younger, more diverse or less wealthy, according to Roger Entner, a telecom analyst with Recon Analytics. T-Mobile’s strength among these demographics is closely connected to its reputation as a budget carrier.

But it’s likely that many T-Mobile customers have never owned a brokerage account or traded stocks. Recent research shows the vast majority of minorities do not own stocks, bonds or mutual funds. Overall, 14 percent of U.S. households have a brokerage account or an IRA, according to a study last year by the Labor Department. Of those, less than 10 percent were in the bottom half of the country’s income brackets.

T-Mobile’s offer of company stock could introduce millions of people to the stock market and the basics of investing.

“It's great that more people are getting exposure to investment,” Entner said. “For some of them, it will be a transformation. For others, they'll take their share and sell it and hopefully buy a gift for somebody they love.”

But T-Mobile customers receiving company shares could face a more complicated process at tax time, especially if they’ve never owned stock outside of their retirement accounts. The first share customers receive will be treated essentially as a one-time credit on their wireless bills and would not be subject to income tax, the company said in a statement.

Additional shares customers receive for recommending friends would have to be documented on a 1099 form by T-Mobile, and customers would need to report the shares as taxable income on their tax returns. The value of the additional shares would be listed as “other income” on their 1040 tax form, where the money would be taxed the same as the rest of their ordinary income, said Donald Zidik, an accountant with Marcum LLP in Needham, Mass.

At about $43 a share, the tax bill may be not be much for customers receiving a handful of shares, but it could grow for customers raking in tons of referrals. (Participating in T-Mobile’s stock program is optional, and only the primary account holder on a plan can claim the stock, which means that children in a family plan, for instance, are not eligible to receive the shares. Longtime subscribers who’ve been with the carrier for five years or more will be awarded two shares per referral.)

The more complicated tax event may happen when customers decide to sell their shares, which may boost their tax bill or require them to file additional tax forms, Zidik said. If the stock’s value has risen since they received the shares, customers will need to report those gains and pay taxes on the difference. If the stock has dropped in value, any losses up to $3,000 could be used to reduce their taxable income.

Those capital gains and losses would need to be reported on the Schedule D, which could require some taxpayers to pay an additional fee to their tax preparer or to pay for a more expensive version of tax preparation software. And what T-Mobile subscribers owe in taxes on the sale of their stock will depend on how long they’ve held on to their shares; they will pay a lower rate if they’ve kept them for more than a year, although low-income customers may find that the IRS exempts them from paying long-term capital gains taxes at all.

If all this sounds confusing to you, you’re probably not alone. It’s a sign of how complex the battle between wireless carriers has gotten as they fight to retain their customers and poach new ones from other rivals. With smartphone sales plateauing worldwide and cellular usage peaking in the United States, wireless companies must now offer increasingly aggressive promotions to lure customers away from the competition. By making its customers partial owners in the company, T-Mobile is hoping to ward off attempts by AT&T, Sprint and Verizon to snatch those consumers back.

David Kretzmann, an investing analyst with Motley Fool Supernova, said the plan was smart and in keeping with T-Mobile’s counterculture ideas. Plus, he said, current investors are unlikely to see much of a change, even if a lot of T-Mobile customers take advantage for the offer. Wall Street will be happy if the program generates greater customer loyalty and user growth.

The new T-Mobile shareholders aren’t expected to have much clout in company governance. T-Mobile is not issuing new stock; it’s simply buying up existing stock on the markets and giving it to its customers. Because of that approach, the program could get increasingly expensive for T-Mobile if its stock value rises, said Entner, the Recon Analytics analyst, as T-Mobile would have to pay more per share to fulfill its obligation to customers as long as the stock offer was an option.

Other firms have taken similar steps in the past, though nothing in quite the same way or on the same scale as T-Mobile. GoPro, for instance, gave its customers a direct way to buy into its initial public offering in 2014 — also using Loyal3, the brokerage platform selected by T-Mobile that will help manage its customers’ new shares.

Loyal3, which counts basketball star Shaquille O’Neal among its investors, does not charge a fee or commission for buying or selling. And it appears to be geared toward people with little experience in stocks. This makes perfect sense for T-Mobile’s customer base. And in partnering with T-Mobile, Loyal3 will gain access to millions of potential investors and a big brand name that it can use to persuade other companies to work with it, as well.

Consumers are increasingly interested in feeling a sense of ownership in the companies they patronize, Kretzmann said. Social media, he said, has made the bonds between executives and regular people closer than ever — particularly so in the case of T-Mobile chief executive John Legere, who’s known for his colorful Twitter feed.

Will we see more companies take approaches like this? Kretzmann thinks so. “I think more companies will want customers to be part-owners — to have more customers who want to see the company succeed over the long-term,” he said.