Question
I sold stock I received over several years through a dividend reinvestment plan. How do I compute the basis for this stock?
Answer

An investor must include in income the amount received as a dividend. A dividend reinvestment plan 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. Therefore, 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 haven't 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.
  • Determine the basis by using the first-in first-out rule if you can't specifically identify which shares you sold.
    • 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, you sold the oldest shares you owned 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.
      • Even if you sold the oldest shares you owned first, under certain circumstances, you may elect to use average basis rather than the actual basis of the shares you acquired first to determine the basis of those shares you acquired pursuant to a dividend reinvestment plan.