Ask the taxgirl: Reinvested Dividends

Taxpayer asks:

I don’t understand. I have my stocks on a program that reinvests the dividends back into the stock. My broker says that this increases my bases. But my CPA says that I have to report this on my taxes. Why is this if I haven’t sold the stock?

Taxgirl says:

Dividend Reinvestment Programs (often called DRIPs) are programs where dividends that would have normally been paid out in cash are reinvested instead, as your broker described.

However, this doesn’t change the nature of the dividends - they still qualify as dividends and you have to report them on your tax return. You will receive a form 1099-DIV reporting the amounts paid or reinvested.

Your broker is also correct that this increases your basis. The dividends are used to “buy” more stock and it increases the value of the stock. When you sell, you’ll use the original purchase price + the reinvested dividends to calculate your basis for purposes of capital gains.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl!

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