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"The board will now evaluate alternative transaction structures to separate the Alibaba stake, focusing specifically on a reverse of the previously announced spin transaction," Yahoo said in a release.
Read More If Yahoo's for sale, who's interested?
The move comes amid uncertainty over whether the spinoff of its 384 million-share stake would be taxed, and would reduce the risk of a significant tax payment for a transaction meant to create value. The IRS told Yahoo earlier this year that it would not rule on whether the company could avoid a tax hit when putting its stake in a separate entity, which it planned to name Aabaco.
"We believe that the previously announced spin off would be tax free to Yahoo and its shareholders," said Maynard Webb, chairman of Yahoo's board of directors. "Among other factors, we were concerned about the market's perception of tax risk, which would have impaired the value of Aabaco stock until resolved."
Given the circumstances, Yahoo said it will try other transaction structures to separate its stake in Alibaba, including a reverse spinoff. This reverse spinoff would include assets and liabilities other than Yahoo's stake in Alibaba.
"A separation from our Alibaba stake, via the reverse spin, will provide more transparency into the value of Yahoo's business," Yahoo CEO Marissa Mayer said. In a Wednesday conference call, she also said this decision reaffirms Yahoo's commitment to shareholder value and that separating its Alibaba business will let it attract more talent.
Shares of Yahoo rose about 3 percent in premarket trading.
The company also said that Max Levchin, former chairman of Yelp, has resigned from Yahoo's board. "Mr. Levchin is resigning due to his other professional commitments and demands on his time, and not due to any disagreement with Yahoo on any matter related to Yahoo's operations, policies or practices," Yahoo said in an 8-K filing released Wednesday.
"He, of the board members, was probably the most tech-innovative focused of them. That's the voice that they needed at core Yahoo. Him stepping down is a negative," Mark Mahaney, tech analyst at RBC Capital Markets, told CNBC's "Squawk Box."
— CNBC's Jacob Pramuk contributed to this report.
Correction: This story has been updated to reflect Max Levchin is the former chairman of Yelp.
Disclosure: CNBC has a content-sharing partnership with Yahoo's finance site.