Taking Stock of Reinvested Dividends’ Impact on Capital Gains Taxes

capital gains taxes

Reinvested dividends can be an easy and inexpensive way to boost your portfolio’s balance, but unless careful records are kept, the resulting impact on a stock or mutual fund’s basis may be overlooked.  For tax purposes, the definition of basis is the value of an asset used to compute gain or loss when the asset is sold.  In other words, it is the asset’s purchase price.  Do you really know your basis in the stocks and mutual funds in your portfolio?  If not, you may pay more in taxes than necessary when those investments are sold.

For income tax purposes, reinvested dividends are deemed to be constructively received by an individual.  These earnings, which are reported on Form 1099-DIV, are taxed in the year received as regular dividend income, although cash was not actually distributed.  Therefore, if the reinvested dividend is not added to the cost basis of the stock or mutual fund from which it was issued, you eventually could pay more in capital gains tax when the investment is sold.

For example, if you were to purchase 100 shares of stock for $1,000 in 2017, and had total dividends of $500 reinvested over the next three years, the adjusted basis on the entire investment, including the new shares purchased with the $500 of reinvested dividends, would be $1,500.  If you then sell all your stock shares for $2,000 in 2020, you only need to pay tax on a gain of $500 (the difference between the sales price and the adjusted basis), rather than on $1,000 (the difference between the sales price and the original cost basis).

While mutual funds are required to keep records of each investor’s tax basis, and report it to the investor and IRS when shares are sold, it is a best practice to maintain careful records so that you can confirm the basis amount reported when the investment is sold.

Let’s switch gears and think about reinvested dividends on investments held inside a qualified retirement plan, instead of a taxable investment account held by you individually.  Qualified retirement plans, such as a 401(k), are not subject to capital gains taxes.  Tax is deferred on any gains inside your 401(k) account as your account grows.  You will eventually be taxed on the value of your 401(k) account when you receive income in the form of a distribution.  This distribution income will be taxed as ordinary income to you in the year you receive the distribution.  Because retirement accounts are not taxed under the same rules as taxable investment accounts (i.e., they are not subject to capital gains tax), basis adjustments for reinvested dividends have no tax impact on your 401(k) account or future distributions.

If you have any questions about reinvested dividends, or would like to request a speaker on this topic for your organization or event, contact one of our executives below at (800) 270-9629.

Eric Elliott

Eric Elliott


Heather Martin

Heather Martin

Senior Manager

Megan Brummitte

Megan Brummitte


Related Posts
The new Tax Cuts and Jobs Act (TCJA) can be confusing for many-- especially small business owners.  Although many aspects of the TCJA have been discussed, one component of the...
Read More

Government Clamps Down on “Deductible Fun” for Businesses

As businesses consider the impact of the Tax Cuts and Jobs Act (TCJA) introduced late last year, the corporate tax rate is receiving substantial attention.  However, according to a 2014...
Read More

2018 Tax Reform – The Excess Loss Limitation Likely to Squeeze Owners of Cyclical Businesses

According to its tagline, Atlanta Business RadioX spotlights “the city’s best businesses and the people who lead them.”   PYA is pleased to share that one of its own, Consulting Principal...
Read More

PYA’s Lori Foley Shared Insight in Live Radio Interview

Many Americans have a 401(k) retirement savings plan as a benefit of employment with their employers.  They contribute a percentage of their compensation to their 401(k) each pay period with...
Read More

Taking Distributions from Your 401(k): What You Need to Know

The recent Tax Cuts and Jobs Act (TCJA) imposes a limit on deductions for business interest for taxable years beginning in 2018.  The limit, like other aspects of the law,...
Read More

IRS Sheds Light on New Limit on Business Interest Expense Deductions

The Tax Cuts and Jobs Act (TCJA) of 2017 brings sweeping changes for many businesses. Along with a reduced corporate tax rate and the elimination of the Alternative Minimum Tax...
Read More

Looking Ahead: Net Operating Loss Rules under the New Tax Act

Are you feeling unease about the impending Tuesday, April 17 tax filing deadline? Fear not –the Internal Revenue Service (IRS) permits a taxpayer to file an extension to allow time...
Read More

The Tax Deadline Looms: Need More Time?

Medicare cards are getting a much-needed facelift.  The Centers for Medicare & Medicaid Services has announced its intention to remove Social Security numbers from the cards in an effort to...
Read More
Medicare card scam

New Medicare Cards in the Mail—Don’t Fall Prey to Scammers

The ink on the Tax Cuts and Jobs Act (TCJA), which swept in a tidal wave of changes to federal tax rules, had been dry for only seven weeks before...
Read More

New Budget Agreement Brings Additional Tax Changes

Share This Insight

If you received value from this article, please share it with your network (e.g., Facebook, Twitter, LinkedIn). Icons below for your convenience.

Stay Current

* indicates required
Monthly eNewsletters
See more newsletter and alert options.

PYA Population Health Ascend

PYA Healthcare Blog

PYA Thought Leadership Services

The Healthcare Loop