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 Form 1040 (PDF) or Form 1040A (PDF). If your total income from ordinary dividends exceeds a dollar
amount set by law, 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.
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.
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