How to Report Tax for Stock DRIP Plans
Dividend reinvestment plans (DRIPs) allow investors to get started in the stock market with only a small amount of money. With a DRIP, investors purchase shares of stock slowly over time, by investing a certain amount of money each month and reinvesting any dividends into purchasing additional shares. This kind of plan provides a great deal of flexibility and freedom, but it also complicates tax planning, since those dividends are taxable whether they are reinvested into additional shares or paid to you in cash.
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Instructions
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Compute the original cost basis for your DRIP shares by looking at your purchase confirmation. If the DRIP purchases stock directly from the company and receives a discount off the open market price, the IRS considers the discount to be an additional dividend, and you must pay taxes on that amount. So if you invest $1,000 in a DRIP with a 5 percent discount, the IRS considers that extra $50 to be a taxable dividend.
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Keep the copies of the 1099-DIV forms you receive from the administrator of the DRIP. Report these amounts on Schedule B when you complete your tax return. You must pay taxes on the dividends you receive from the DRIP, even when that money is reinvested into additional shares.
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Add the amounts of the dividends reported on the 1099-DIV form each year. Add these amounts to your original cost basis and keep careful track of how much money you have invested in that stock.
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Subtract the total cost basis, including the amount you originally invested plus the dividends you received along the way, from the proceeds of the sale. This is the amount of your capital gain.
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Report your capital gain on Schedule D when you file your tax return. Transfer the total capital gain to your 1040 form and file your return.
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References
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