Frequently Asked Tax Questions And Answers
Keyword: Dividend Reinvestment 10.2 Capital Gains, Losses/Sale of Home: Stocks (Options, Splits, Traders)
How do we show on our tax form where dividends are reinvested?
Some corporations allow investors to choose to use their dividends to buy more
shares of stock in the corporation instead of receiving the dividends in cash. If
you are a member of this type of plan, you must report the fair market value on the
dividend payment date of the dividends that are reinvested as income on your tax return.
You do not actually show that the dividends were reinvested on your return. Keep good
records of the dollar amount of the reinvested dividends, the number of additional
shares purchased, and the purchase dates. You will need this information when you
sell the shares.
Report the dividends that were reinvested with your other dividends, if any, on
line 9 of Form 1040 or Form 1040A. If your total income from ordinary dividends is
over $1,500.00, you also must file either Form 1040, Schedule B (PDF) or Form 1040A, Schedule 1 (PDF).
For more information on this and other types of dividend reinvestment plans, refer
to Ordinary Dividends in Chapter 1 of Publication 550, Investment
Income and Expenses.
References:
How do I compute the basis for stock I sold, when I received the stock over
several years through a dividend reinvestment plan?
The basis of the stock you sold is the cost of the shares plus any adjustments,
such as sales commissions. If you have not kept detailed records of your dividend
reinvestments, you may be able to reconstruct those records with the help of public
records from sources such as the media, your broker, or the company that issued the
dividends.
If you cannot specifically identify which shares were sold, you must use the first-in
first-out rule. This means that you deem that you sold the oldest shares first, then
the next oldest, then the next-to-the-next oldest, until you have accounted for the
number of shares in the sale. In order to establish the basis of these shares, you
need to have kept adequate documentation of all your purchases, including those that
were through the dividend reinvestment plan. You may not use an average cost basis.
Only mutual fund shares may have an average cost basis.
Refer to Publication 550, Investment Income and Expenses, and Publication 551, Basis of Assets.
References:
I know the basis of stock includes the cost of the original purchase, but
does it also include the value of stock acquired through a dividend reinvestment plan?
Unless you sell all of your shares at one time, your total basis, which includes
both your original purchase and any purchases through a dividend reinvestment, is
not the figure used to report the sale of shares. If you sell less than all of your
shares at one time, you need to have kept adequate documentation of all your purchases,
including those that were through the dividend reinvestment plan in order to establish
the basis of the shares sold. You may not use an average cost basis. Only mutual fund
shares may have an average cost basis.
When reporting the sale of shares of stocks, the basis for the calculation of gain
or loss is the actual cost (plus adjustments, such as sales commissions) of those
shares. If you cannot specifically identify which of your shares were sold, you must
use the first-in first-out rule.
For more information, refer to Publication 550, Investment Income and
Expenses, and Publication 551, Basis of Assets.
References:
Do I have to pay taxes again on the stock acquired through a dividend reinvestment
plan when I sell them?
After you report the dividends as income, you have basis in the shares acquired
through dividend reinvestment. When you report the sale of the shares, you will be
taxed only on the amount that the sales proceeds (minus commissions) exceed your cost
basis (in this case, the amount of the dividends reinvested).
References:
Would the shares acquired by stock dividends have a shorter holding period
than the original shares purchased?
Yes, if they were taxable stock dividends, the holding period begins on the date
the new shares were distributed by the corporation. For nontaxable stock dividends,
the holding period is the same as the underlying stock.
When you purchase additional mutual shares with reinvested dividends, the dividends
are generally taxable. You thus have a holding period starting on the date of the
transaction, as reported in your statements, just as you do for shares that you purchase
outright.
References:
Would shares in mutual fund acquired through dividend reinvestment in prior
years be long-term capital gains while shares acquired through dividend reinvestment
in the year of sale be treated as short-term capital gains?
Any shares or fractional shares purchased and sold during the current tax year
are short-term capital assets. For shares purchased in the year previous to the tax
year to be considered long-term, the holding period must be more than one year.
References:
10.3 Capital Gains, Losses/Sale of Home: Mutual Funds (Costs, Distributions, etc.)
If I do not have the records showing each dividend reinvestment, how do
I calculate the basis of my shares in a mutual fund that I acquired years ago?
Unless you have acquired shares through gifts or inheritances, your basis is what
the shares cost you. Your mutual fund company can often provide you with this information
upon request. Another source of information is your broker, if the fund was purchased
through a broker. You cannot calculate your basis in your mutual fund shares accurately
without this information. You can only claim the amount of basis that you can establish
and substantiate with records. You may lose a large part of your basis if you cannot
establish the amount of dividends that were reinvested. This is why keeping records
is so important.
Another source of information on reinvested dividends is your prior year tax returns.
If your mutual fund has been reinvesting dividends, those reinvested dividends should
have been reported as dividend income on your tax return each year.
For more information, refer to Publication 564, Mutual Fund Distributions.
References:
Do the dividends and/or capital gains I report affect my cost basis of the
individual mutual fund shares I own?
They would affect your total basis and total number of shares if they were reinvested
in the mutual fund. Add the reinvested dividends and capital gains that you have reported
as income on your tax return to your total basis. You will also own additional shares
in the fund because the dividends and capital gains have been used to purchase shares.
Keep good records. If you are going to be using an average basis method to determine
per-share basis on sales, be sure and keep records of all your mutual fund activity
until you no longer own any shares in that fund.
There is a worksheet to help you keep track of your number of shares and your basis
in Publication 564, Mutual Fund Distributions.
References:
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