sold DRIP earnings
I have been participating in dividend reinvestment
for a stock I hold. I understand that because I paid taxes on these
dividends when I earned them, they will be used to calculate my
basis when I sell. When I do sell the stock, how do I report this?
Will I have to make multiple entries on Schedule D, one for the
initial purchase and separate entries for each of the quarterly
dividend payments that were used to acquire additional stock at
different times? Wouldn't those dividends held for less than a year
fall into short-term gains, with earlier dividends and original
purchase being long-term gains? -- Susanne
In a dividend reinvestment plan a shareholder elects to purchase
additional shares of the dividend-paying company's stock in lieu
of receiving the equivalent sum of money. The reinvestment plan
generally does not have transaction costs.
The amount of the dividend is subject to income tax
even though it was not received. The shareholder is treated as having
received the dividend and then acquiring the stock. Thus the cost
of the shares acquired is considered to be the amount of dividends
received. And the date the dividend was paid is considered the date
acquired for purposes of computing the holding period (i.e., long-
or short-term capital gain or loss).
In computing gain or loss, it is important to keep
track of the dividends reinvested so that you don't end up paying
tax twice, once when the dividend was paid and then again on the
sale. As an example, suppose you purchased 100 shares originally
for $1,000 and that the quarterly dividends of $10 allowed you to
acquire one additional share each quarter for three years. After
the third year you sell the 112 shares so that the last four shares
were held for one year or less. These last shares should be reported
on Schedule D as short-term gain and the 108 shares purchased earlier
would be reported as long-term gain.
As far as reporting the sale on Schedule D, I would
show the sale date and the date acquired as "various,"
identifying the number of shares that would be treated as long-
or short-term gain or loss.