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PaperclipPerfector  2mo ago (text post)   2863 thread views

Small-Scale Question Sunday for February 9, 2025

Do you have a dumb question that you're kind of embarrassed to ask in the main thread? Is there something you're just not sure about?

This is your opportunity to ask questions. No question too simple or too silly.

Culture war topics are accepted, and proposals for a better intro post are appreciated.

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No question too simple or too silly.

When I have any security set up with DRIP (dividend reinvestment plan), my cost basis on these new fractional shares is showing up as $0.00.

This seems like a visible, tangible difference from how it'd be if I'd “coincidentally bought shares” just afterwards (with the dividends) manually — which would, at least as far as the new shares are concerned, seem to be a better situation since if/when I sell those new shares I'd be realizing less gain.

So… does DRIP actually affect the basis of the shares that issued the dividend? Do I get some adjustment to its basis when the dividends are DRIP'd to compensate me for this zero-basis on the new shares?

Wouldn't you have to pay capital gains tax on the dividends you collect right away, if you were to follow the collect-and-buy-manually algorithm? If you get $1 in dividends and buy $1 in shares which you later sell for $3 from a cost basis of $1, you pay tax on $1 initially and $2 at sale. If you use your DRIP to auto-buy the same shares, you pay no tax initially and later sell an $3 share with $0 cost basis and hence pay tax on $3.

If you use your DRIP to auto-buy the same shares, you pay no tax initially

Are you sure about that?

https://www.investopedia.com/investing/perks-of-dividend-reinvestment-plans/

Even though investors do not receive a cash dividend from DRIPs, they are nevertheless subject to taxes, due to the fact that there was an actual cash dividend--albeit one that was reinvested. Consequently, it’s considered to be income and is therefore taxable. And as with any stock, capital gains from shares held in a DRIP are not calculated and taxed until the stock is finally sold, usually several years down the road.

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