Tax Implications of DRIP Investments

In terms of taxes, dividends that are paid on shares of stocks are taxable as ordinary income on your income tax return.  This is the case – regardless if they are reinvested or received in cash. You must pay taxes on all dividends, reinvested or not, in the year in which you received them.

Dividend reinvestors need to keep very accurate records, including all statements, in order to determine the cost basis of shares when you sell them.

In addition, when the company sponsoring a DRIP pays fees and commissions on the investor’s behalf, the IRS requires that the investor report that amount as extra taxable income.

The amount paid will show up on the 1099-DIV form, as well as on account statements.

Will go into a lot more detail on this item later.

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