How do you pay taxes on a stock with reinvested dividends?

[Skooby]

If I buy a stock that reinvests the dividends and a year and a half later sell that stock, what are the tax implecations of that? Would I have to figure it or is a statement sent out for me?

Assume that I did not invest monthly in the stock. I bought it at a certain price and held on to it for a year and a half.

[Birchtree]

Your montly statments should record the number of shares you purchased with dividend reinvestments - they'll add everything up for you and show you your gain or loss. You have to declare your dividend income yearly to the IRS even when you reinvest them - the IRS doesn't care what you do with the income - they have the 1099s so there is no place to hide. In 2010 they will also get a copy of any purchases so they'll know exactly what you paid and what you sold for.

[Bullitt]

You already paid taxes on the dividend. When you sell, your cost average will be initial price paid, plus whatever amounts the dividends bought and at what price. I'm guessing your dividend was small compared to your initial splurge, so it shouldn't affect your cost basis in a very noticeable manner.

If you plan on selling it, sell it before it spits out another dividend.

[Skooby]

Let me see if I understand this correctly.

If I don't sell a stock i'll pay taxes on any dividends at tax time when they'll send me a 1099.

But if I do sell a stock, say in June, and i've had 5 monthly statements for dividends, would I still have to report those at tax time? Or does the sell of the stock circumvent all of that?

[Bullitt]

Divvy's are taxed as income in the year they are dished out, similar to interest on a savings account. Since you re-invested them, it's like buying or making a stock purchase. So yes, you kind of get taxed twice. I just looked over some of my stuff and some of my ETF's paid special dividends this year. Ha, yeah, thanks, that's really special.

Honestly, I wouldn't sweat it. I had $330 in LT cap gains in a mutual fund I sold this year and it comes out to $30 or so. The dividend I owe taxes on looks like it will only be like .10 cents in taxes.

Here's my best advice. Don't ever hold onto a loser because you're afraid of the tax man.

[Skooby]

Thanks.

I got a question about cost basis. If I buy 30 shares of stock at $100 and two months later buy 80 shares at $39, what would be the cost basis of the stock?

I've heard of brockers letting you sell specific shares (like just selling the 30 shares at $100). But what if an online brocker doesn't let you sell specific shares?

[Birchtree]

You'll simply have to keep track of your own sales and the cost of the remaining shares. I pick and choose as I like not always going with the broker statement because they usually follow the FIFO accounting. The only time you will need to worry is when the IRS notifies you of an impending audit. I usually put in a loss that goes against me just in case there is an audit - you'll possibly break even. I've never been audited but you never know. Just stay as honest as you can. Starting in January the IRS will get a copy of all your transactions - both purchases and sales. They are tightening the grip.

[Skooby]

I'm signed up with sharebuilder. They use the Fifo method.

So in my example, I bought 30 shares at $100 then 80 shares at $39. Lets say the price has risen to $120.

In 2010 if I sell just 30 shares the cost basis will be $100? And then I sell the rest of the shares in 2011 the cost basis will be $39?

[Birchtree]

You can indicate on your Schedule D that you are using a cost basis for each sale - just keep track of what you have left. If you decide to sell all 110 shares at once just put down next to the transaction cost basis used. I don't think anyone at the IRS owns any stock anyway. The important thing is to make sure the total sales amount adds up to the 1099 amount - that's all the computer sees.