25 Feb How a DRIP sale is taxed

Q. I just sold stock shares that I purchased through a Dividend Reinvestment Plan (DRIP). I have held the stock for five years, and reinvested the dividends each quarter. My 1099-DIV forms each year have shown my reinvested dividends plus company paid fees. In determining the cost basis for my stock sale, do I use only the actual dividend amounts that were used to purchase the stock? Or, do I also include the company paid fees in my cost basis?

A. Dividend reinvestment plans can be a great way to have an automatic savings plan.

When you purchase shares of stock, your cost basis is the amount you paid for the stock, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

“If the stock pays a quarterly or annual dividend, it’s income to you, and you must pay federal and state income tax on it,” he said. “This is true even if you have the dividend reinvested in more stock through a DRIP.”

Kiely said each quarter’s reinvested dividend is an additional stock purchase with its own acquisition date and holding period. The cost basis for each additional share of stock is the amount shown on the annual form 1099-DIV.

“If the company paid fees are included on the 1099-DIV, then it is also part of your cost basis,” Kiely said.

We have another important piece of tax advice given that you just sold some shares, courtesy of Joseph Matheson, a certified public accountant with Matheson & Assoc. in Whippany.

“Remember it is only the stock held for more than one year that receives long-term capital gain/loss treatment, so the purchases of shares in the last year, if sold, would generate short-term gains/losses,” Matheson said.

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This story was first posted in February 2015.