Stocks (Options, Splits, Traders)
This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
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 $400, 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 (PDF), 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 (PDF), Investment Income and Expenses, and Publication 551 (PDF), 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 (PDF), Investment Income and Expenses, and Publication 551 (PDF), 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.
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 Captial 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 (PDF), 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 (PDF), Mutual Fund Distributions.
References:
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