Question on reporting income from sale of stock held under DRIP?

N

NancyNGA

Well-known Member
Location
Georgia
I have been unable to find this explained in enough detail anywhere for me to understand. IRS seems to get bogged down in how to report partial sales (first in, first out, rules, etc) and skips over how to handle reinvested dividends. I don't own enough stock to worry about partial sales. LOL!

Suppose:

You buy one share of stock at $100/share under a dividend reinvestment plan (DRIP). After 3 years you end up with 1.2 shares, and sell at $200/share, or $240. Meanwhile you have paid taxes on the following dividends:

$5, $6, $7 = $18.

Is the following correct?

When you report income on the sale, do you deduct the dividends you already paid taxes on in previous years?

In other words, report a gain of $122 ? ( $240 - $100 - $18 = $122)

Is there anything else to consider? Is this capital gains? Long term?

(Unless it is more complicated than this, I still refuse to pay someone to do my taxes. :rolleyes: :))
 

Last edited:
dividends get added to your cost basis . in the eyes of taxes you are adding new money . dividends are either qualified or not qualified . there are quite a few factors that determine that .

think of it as you bought a stock for 100 bucks , you got a 1 dollar dividend . the irs taxes you on that 1 dollar . however that stock is revalued at 99 dollars after the exchanges subtract out the payment .

so you reinvest the dollar and get .01 shares . now you have 1.01 shares at 99 dollars .

the stock climbs 10% back to 100 and you sell . your cost basis is 101 dollars including the dividend . you sell all 1.01 shares for 100 a share and get proceeds of 101 dollars .

you paid 100 a share , got taxed on 1.00 dollar in dividends so your cost is now 101 and got 101 dollars in the sale . you would break even .
 
I don't understand. If you get a dividend from a stock that's income you pay tax on. It's like interest.

Unless you dispose of the stock there should be no capital gains to worry about.

That's when you cost base comes in to play.
 

Thanks, mathjak. Looks like I might have to do a Form 8949, in addition to Schedule D. Reading instructions now. As far as I can tell nothing was reported to IRS.

I think it should all be long term capital gains, original purchase was over 10 years ago. (Except technically stock that was bought from the reinvested dividends for the last 12 months? :) I doubt that would be more than a dollar gain, or loss.) I tend to overthink this stuff. :rolleyes:

Camper6: I did dispose of it, in 2017
 
NancyNGA said:
Thanks, mathjak. Looks like I might have to do a Form 8949, in addition to Schedule D. Reading instructions now. As far as I can tell nothing was reported to IRS.

I think it should all be long term capital gains, original purchase was over 10 years ago. (Except technically stock that was bought from the reinvested dividends for the last 12 months? :) I doubt that would be more than a dollar gain, or loss.) I tend to overthink this stuff. :rolleyes:

Camper6: I did dispose of it, in 2017
Click to expand...

Now it's fun time.
 
i believe the reinvested shares are considered new purchases and are subject to new holding periods to qualify for long term capital gains if sold .

be careful stopping drips prior to selling some shares at a loss or you can run in to wash sale rules.

why form 8849?
 
Camper6 said:
I don't understand. If you get a dividend from a stock that's income you pay tax on. It's like interest.

Unless you dispose of the stock there should be no capital gains to worry about.

That's when you cost base comes in to play.
Click to expand...

correct the capital gain is only when sold . i illustrated the entire process including how the cost basis is adjust and is later factored in the sale .
 
Camper6 said:
I don't understand. If you get a dividend from a stock that's income you pay tax on. It's like interest.

Unless you dispose of the stock there should be no capital gains to worry about.

That's when you cost base comes in to play.
Click to expand...

a dividend is a bit more complex than interest . interest is easier because interest is on top of principal . a dividend is spinning off a piece of your existing money investment and giving it to you in a different form .

interest has an actual gain , a dividend is a zero sum game

the irs likes to tax us on what is really a return of the money you gave them and then they credit you later when you sell by allowing you to subtract it off the gain so you get it back .

in reality you give them 100 bucks and they in turn hand you 1 dollar back as a dividend . they then reset your price back to 99 a share and you have 1 dollar in pocket. you have nothing extra in value you did not have the night before the reset . you now have 1.01 shares if you reinvest at 99 a share at the open vs 1 share at 100 the day before .

so dividends and interest are not the same thing . . if you had 100 dollars and got 1 dollar in interest you would have 101 the next morning . so dividends merely pay out a piece of what you already had .

it would be more like having that 101 in interest and they pay you that dollar after bringing your balance to 101 and reset you back to 100 with 1 dollar in hand .
 
mathjak107 said:
i believe the reinvested shares are considered new purchases and are subject to new holding periods to qualify for long term capital gains if sold .

be careful stopping drips prior to selling some shares at a loss or you can run in to wash sale rules.

why form 8849?
Click to expand...
Could be it's not necessary. I'll use it as a worksheet, and decide later. Just briefly read the rules so far. Not getting serious yet. It's not close enough to the deadline. LOL!
 
You must log in or register to reply here.

Back
Top