March 28, 2025 - Fractional shares emerged from the dot-com boom in 1999 as an experimental product from a brokerage called BuyAndHold.com. The firm used software and the newly ascendant internet to allow individual investors to purchase a fraction of an equity — say $5 of a $54.41 IBM stock — which had never been done before at scale.

Like many early internet startups, the company went out of business a few years later. But the promise of its flagship product — to democratize access to low-cost trading and purchase fractions of shares — caught on. This is the story of how this idea evolved into the present widespread consumer trading strategy used to balance portfolios.

This brief history will help you evaluate whether your brokerage should consider offering fractional trading to customers. It can also help you understand how to navigate all the tax complications they introduce for a broker-dealer.

To skip ahead:

• History
• Benefits
• Tax Implications

Fractional Shares Finally Took Off in the 2010s

The 1990s were a time of rapid financial innovation. Mutual funds had existed for three-quarters of a century, but not until ETFs made them instantly accessible to people outside major financial centers. Investment in computer equipment alone contributed 0.3 percentage points to the U.S. GDP between 1995 and 1999 as millions of Americans began using computers to manage their money.

The concept of fractional investing, which BuyAndHold.com pioneered, could only have emerged then. The company stirred consumer attention by charging a flat fee of $2.99 per trade instead of the percentages other brokerages charged.

“This is an opportunity for everybody and everyone to participate on Wall Street,'' Peter E. Breen, chief executive of Buyandhold.com, told The New York Times. “This is the feel-good service of Wall Street.”

The fractional concept appealed to newer and younger investors with less capital who wanted access to more expensive stocks and funds. It also offered, at least in theory, a way to perfectly balance a portfolio. BuyAndHold was, however, beset by technological limitations. The company batched its trades twice per day, and investors could not know the exact price before their trade. The website also did not meaningfully integrate with their other investment tools.

Subsequent companies adopted the idea. The trading app Robinhood — launched in 2014 — allowed people to trade on the go with a minimum investment of just one cent, including fractionally, to “1/1000000 of a share.” Similar apps and websites followed in a personal finance revolution, making investing easy and accessible through technology companies. The concept was then built into the first cryptocurrency networks.

When Bitcoin reached its all-time peak in 2016 and gained mass media attention, the idea that you could trade in fractions of something — whether an equity or coin — seemed commonplace.

Benefits of Fractional Shares

Fractional shares are great for dollar-based investing and dollar-cost averaging. They allow an investor to balance a portfolio to the fractional cent. Fractional shares carry no voting rights but do provide proportional dividends, which many investors choose to reinvest.

Today, your customers can access fractional trading via:

• Robinhood
• Fidelity
• SoFi
• JPMorgan Chase
• Charles Schwab
• WeBull
• M1 Finance
• Vanguard
• Stash
• Firstrade

And possibly even your firm.

Fractional shares do have a few downsides, however. The only way to allow clients to trade in fractional shares is for the broker-dealer to either hold those equities or ETFs or develop a system for purchasing them from another network. This is exceedingly rare. Brokers would have to build their own platform robust enough to track those shares for customers and act as custodian for those complete shares. Few have done so. Either way, fractional shares create an immense amount of tax complexity, which is worth understanding in detail. Shares can be partitioned. IRS attention, unfortunately, cannot.

Tax Implications of Fractional Shares

Regulators, accounting firms, and industry participants are now actively discussing the implications of fractional share programs, for they are not as simple as they might appear. It is important to fully understand how fractional shares work and the regulations that surround them before deciding if they are right for your customers.

To recap, a fractional share is less than one full share of stock or exchange-traded funds (ETF). Customers can allocate a specific dollar amount rather than the number of shares they want to invest in.

What is not often discussed is that fractional shares can also emerge due to stock splits or similar corporate actions. These split stocks are not available from stock exchanges and are difficult to sell. Still, some broker-dealers have recently begun offering customers the ability to invest in these.

Because broker-deals must hold the financial instrument, it raises important accounting and tax questions. Do fractional shares belong on the broker-dealer’s balance sheet, or can they be derecognized under the Accounting Standards Codification (ASC) Topic 860, Transfers and Servicing? The law is ambiguous. Broker-dealers should conduct an accounting analysis to determine whether to record financial assets for the fractional shares held by its customers and corresponding financial liabilities. These represent secured borrowings that do not meet the derecognition standards under ASC 860 if the broker-dealer is acting as a principal.

To qualify for derecognition under ASC 860, a financial asset must:

• A transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in which the transferor surrenders control over those financial assets shall be accounted for as a sale if and only if all of the following conditions are met:
  • The transferred financial assets have been isolated from the transferor — put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership. Transferred financial assets are isolated in bankruptcy or other receivership only if the transferred financial assets would be beyond the reach of the powers of a bankruptcy trustee or other receiver for the transferor or any of its consolidated affiliates included in 11 the financial statements being presented. For multiple step transfers, a bankruptcy-remote entity is not considered a consolidated affiliate for purposes of performing the isolation analysis. Notwithstanding the isolation analysis, each entity involved in the transfer is subject to the applicable guidance on whether it shall be consolidated (see paragraphs 860-10-40-7 through 40-14 and the guidance beginning in paragraph 860-10-55-18). A set-off right is not an impediment to meeting the isolation condition.
• Transferee’s rights to pledge or exchange are met if both of the following conditions are met:
  • Each transferee (or, if the transferee is an entity whose sole purpose is to engage in securitization or asset-backed financing activities and that entity is constrained from pledging or exchanging the assets it receives, each third-party holder of its beneficial interests) has the right to pledge or exchange the assets (or beneficial interests) it received.
  • No condition does both of the following: 1. Constrains the transferee (or third-party holder of its beneficial interests) from taking advantage of its right to pledge or exchange and 2. Provides more than a trivial benefit to the transferor (see paragraphs 860-10-40-15 through 40-21). If the transferor, its consolidated affiliates included in the financial statements being presented, and its agents have no continuing involvement with the transferred financial assets, the condition under paragraph 860-10-40-5(b) is met.
• The transferor, its consolidated affiliates included in the financial statements being presented, or its agents do not maintain effective control over the transferred financial assets or third-party beneficial interests related to those transferred assets (see paragraph 860-10-40-22A). A transferor’s effective control over the transferred financial assets includes, but is not limited to, any of the following:
  • An agreement that both entitles and obligates the transferor to repurchase or redeem them the transferred financial assets before their maturity (see paragraphs 860-10-40-23 through 40-2540-27)
  • An agreement, other than through a cleanup call (see paragraphs 860-10-40-28 through 40-39), that provides the transferor with both 1) the unilateral ability to cause the holder to return specific financial assets and 2) a more-than-trivial benefit attributable to that ability.
  • An agreement that permits the transferee to require the transferor to repurchase the transferred financial assets at a price that is so favorable to the transferee that it is probable that the transferee will require the transferor to repurchase them (see paragraph 860-10- 55-42D).

The broker-dealer may also need to consider whether or not income statement accounts are impacted based on the accounting conclusions reached.

At the AICPA & SIFMA National Conference on the Securities Industry in November 2021, FINRA and the SEC’s Division of Trading and Markets announced that as long as the broker-dealer carries the long position and maintains control of the shares purchased for its customers, the aforementioned accounting treatment will not likely impact the net capital computation or the reserve formula.

Fractional Shares as an Offering

You will want to investigate the tax implications carefully before deciding if you want to offer fractional shares to clients. It can be a valuable way to market to new audiences and package new portfolio products. However, there is a cost associated with accounting for these products, which you must factor into your operations.

If you would like to discuss the accounting or tax implications of fractional shares, please contact our Financial Services Industry Practice.