To compute the basis for stock received over several years through a dividend reinvestment plan (DRP), you need to follow specific rules outlined in the Internal Revenue Code and Treasury Regulations. Here is a step-by-step guide:
- Identify the Stock Acquired Through the DRP:
- According to § 1012(d)(4), a dividend reinvestment plan is any arrangement under which dividends on any stock are reinvested in stock identical to the stock with respect to which the dividends are paid.
- Determine the Basis of Each Share:
- The basis of stock acquired through a DRP is generally the cost of the shares plus any adjustments, such as sales commissions. This is consistent with the general rule for determining the basis of property, which is its cost (§ 1012).
- Use the Average Basis Method:
- For stock acquired after December 31, 2011, in connection with a DRP, the basis of such stock can be determined using the average basis method (§ 1012(d)(1)). This method averages the basis of all shares of identical stock in an account regardless of the holding period (§ 1.1012-1(e)(7)(i)).
- The average basis is calculated by dividing the aggregate basis of all shares by the aggregate number of shares.
- Election for Average Basis Method:
- You may elect to use the average basis method for shares held in connection with a DRP. This election must be made in writing and is effective for all shares acquired under the DRP (§ 1.1012-1(e)(6)(i)).
- Separate Accounts:
- Shares of stock in a DRP are not identical to shares of stock with the same CUSIP number that are not in a DRP. Therefore, unless a single-account election is in effect, you cannot average together the basis of identical stock held in separate accounts (§ 1.1012-1(e)(7)(i)).
- FIFO Rule if Average Basis is Not Used:
- If you do not elect to use the average basis method, you must use the first-in, first-out (FIFO) method to determine the basis of the shares sold. This means you use the basis of the shares you acquired first as the basis of the shares sold.
- Record Keeping:
- It is crucial to keep detailed records of all dividend reinvestments, including the cost of each purchase and any associated fees. If you haven't kept detailed records, you must reconstruct them using public records, broker statements, or information from the company that issued the dividends.
- Form 1099-B:
- For each sale of a covered security, your broker will provide basis information on Form 1099-B, which includes the date of acquisition, whether the gain or loss is short-term or long-term, and the cost or other basis.
By following these steps, you can accurately compute the basis for stock received through a dividend reinvestment plan. This ensures that you correctly report any gains or losses when you sell the stock.
Sources:
Publication 550 (2023)
§ 1012. Basis of property—cost
§ 1.1012-1. Basis of property.
Rev. Rul. 72-564
Publication 551 (12/2022)
