Although companies often pay their shareholders quarterly cash dividends, shareholders can choose to have their dividend payments reinvested. When that happens, shareholders receive additional shares of stock instead of cash. The Internal Revenue Service classifies reinvested dividends as income, and shareholders are responsible for paying taxes on any gains from the dividend reinvestment.
Find your brokerage statement containing the original stock purchase information. If you cannot find your statement, your broker can provide you a copy. You will need to know how many shares you purchased and the price you paid per share. Retrieve the dividend payment notice you received from the company showing the date the reinvestment dividend was paid, how much you received, and the stock price.Step 2
Look at your brokerage statement and find the original stock purchase price. For example, if you bought 100 shares at $5 a share, your total purchase price is $500. Now compute how much stock the dividend reinvestment purchased. Multiply the amount of your dividend reinvestment by the original number of shares you purchased. If you received a $2 a share dividend reinvestment payment, multiply that by the original 100 shares for a total dividend reinvestment amount of $200.Step 3
Divide the $200 by the current stock price, which for this example is $10 a share, to get the number of shares the dividend reinvestment will buy, which would be 20. Add this to your original number of shares to get the new number of shares you own, which would be 120 shares.Step 4
Use the information to calculate your new stock purchase cost, which is also known as the cost basis. Add the original purchase price, which was $500, to the dividend reinvestment amount of $200 to arrive at $700. Now divide the $700 by the total number of shares you own, which is 120, to get your new cost basis, which would be $5.83 a share. You will need this information to calculate the capital gain or loss and report it on your income tax return.
- Dividend reinvestment allows you to purchase additional shares of stock without paying a broker commission.
- If you received previous dividend reinvestment payments that increased the number of shares you own, use that figure in your computations.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.