A dividend reinvestment plan — or DRIP — automatically reinvests shareholder dividends toward the purchase of additional shares of the same stock. Because these shares are usually purchased over a long period of time, it can make calculating your cost basis more difficult when it comes time to sell your shares. If you have not kept careful records, contact your financial institution, which should be able to provide records of each reinvestment purchase. Knowing the cost basis for each portion of your holdings allows you to decide which portion to sell in the event that you do not sell your entire holding.
Create a two-column chart that shows the number of shares purchased in the left-hand column and the price per share in right-hand column.
Multiply the number of shares purchased or reinvested by the price of the shares at the time of the purchase or reinvestment to find the basis from each purchase. For example, if you reinvested dividends in five new shares at $25 each, your basis for that reinvestment equals $125. Repeat this for each time you had a dividend reinvested to find the costs basis of those shares.
Add the basis from each reinvestment to the original purchase basis to calculate the total basis for your stock. In this example, if the original purchase price had been $12,000, the total basis equals $12,125.
- USA Today: Think of Dividend Reinvestment as Two-Step Process to Determine Average Cost
- Yahoo! Finance: Tax Considerations of DRIP Investing
- Internal Revenue Service. "Publication 551 (12/2018), Basis of Assets," Page 2. Accessed March 14, 2020.
- Internal Revenue Service. "Publication 551, Basis of Assets," Page 9. Accessed March 14, 2020.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."