Stocks (Options, Splits, Traders)
Question: How do I compute the basis for stock I sold, when I received the stock over several years through a dividend reinvestment plan?
An investor must include in income the amount received as a dividend. The dividend reinvestment plan then uses the amount received as a dividend to purchase additional shares or fractional shares of the same stock, usually at the fair market value of the stock on the day reinvested. The basis of stock that you received through a dividend reinvestment plan:
- Is the cost of the shares plus any adjustments, such as sales commissions.
- If you have not kept detailed records of your dividend reinvestments, you must reconstruct those records with the help of public records from sources such as the media, your broker, or the company that issued the dividends.
- The basis must be determined by using the first-in first-out rule if you cannot specifically identify which shares were sold.
- If certain conditions are met, you can use the average basis method to determine the basis of shares acquired in connection with a dividend reinvestment plan after December 31, 2010. You cannot use the average basis method for shares acquired in connection with a dividend reinvestment plan before 2011.
The first-in first-out rule means:
- You use the basis of the shares you acquired first as the basis of the shares sold. In other words, the oldest shares you own are considered sold first.
- You need to have kept adequate documentation of all your purchases, including those that were made through the dividend reinvestment plan in order to establish the basis of these shares.
- Publication 551, Basis of Assets
- Publication 550, Investment Income and Expenses (Including Capital Gains and Losses)
Category: Capital Gains, Losses, Sale of Home
Subcategory: Stocks (Options, Splits, Traders)