Reviewed by David Chen, CFA. Specialized in securities taxation and dividend reinvestment plans (DRIPs).
Calculating the cost basis of investments where dividends are automatically reinvested (DRIPs) can be complex due to multiple purchase transactions. Use this calculator to quickly determine your total cost basis for tax reporting purposes.
Cost Basis with Reinvested Dividends Calculator
Total Cost Basis
$0.00Capital Gain / (Loss)
$0.00How to Calculate Cost Basis with Reinvested Dividends Formula
The calculation is based on aggregating all funds used to acquire the investment.
Capital Gain/Loss = Total Sales Proceeds – Total Cost Basis
Formula Sources: IRS Tax Topic 403 – Basis of Assets, Investor.gov – DRIPs
Variables Explained
- Initial Investment Cost: The original amount you paid for the first batch of shares, including any commissions.
- Total Value of Reinvested Dividends: The cumulative dollar amount of dividends that were used to purchase additional shares. This amount is taxable income in the year it was reinvested.
- Cost of Additional Purchases: Any capital you personally added to buy more shares after the initial purchase.
- Total Sales Proceeds: The final amount of money you received when you sold the investment.
What is Cost Basis with Reinvested Dividends?
Cost basis is the original value of an asset for tax purposes, typically the purchase price. However, when dividends are reinvested through a Dividend Reinvestment Plan (DRIP), the calculation becomes more complex. Since reinvested dividends are treated as income and are taxed in the year they are received, the dollar amount of those reinvested dividends must be added to your cost basis.
If you fail to include the reinvested dividends in your cost basis, you will essentially be taxed twice: first, as ordinary income when the dividend is received, and second, as a capital gain when you sell the shares. Therefore, meticulous tracking of every reinvestment transaction is crucial for accurate tax reporting and minimizing capital gains tax liability.
How to Calculate Cost Basis (Step-by-Step Example)
- Determine Initial Cost: You bought 100 shares at $50 each, with a $10 commission. Initial Cost = (100 * $50) + $10 = $5,010.
- Track Reinvested Dividends: Over five years, you received $800 in dividends, all of which were used to buy more shares.
- Account for Additional Purchases: You later added $2,000 to buy more shares directly.
- Calculate Total Cost Basis: Sum all three figures: $5,010 + $800 + $2,000 = $7,810.00.
- Determine Gain/Loss: You sell all shares for $10,500. Capital Gain = $10,500 – $7,810 = $2,690.00.
Related Calculators
Explore other financial tools to assist with your investment planning:
- Capital Gains Tax Calculator
- Annualized Portfolio Return Calculator
- Taxable Equivalent Yield Calculator
- Dollar-Cost Averaging (DCA) Calculator
Frequently Asked Questions (FAQ)
Is a reinvested dividend taxable?
Yes. Reinvested dividends are considered taxable income in the year they are paid out, even though you didn’t receive cash directly. You will receive a Form 1099-DIV showing this income.
Why is including reinvested dividends in basis important?
Including them prevents double taxation. Since you paid tax on the dividend income when it was received, adding that amount to your basis ensures you aren’t taxed again when you sell the shares for a capital gain.
What accounting method is used for DRIPs?
The most common and simplest method is “Average Cost Basis,” especially for mutual funds. For stocks, the “Specific Share Identification” method is often used to minimize taxes, but it requires tracking the cost and date of every small reinvestment purchase.
What documentation do I need for cost basis?
You need the initial trade confirmation, statements showing all dividend reinvestments, and the final sales confirmation. Most brokerage firms provide a consolidated Form 1099-B which often reports the adjusted basis automatically, but it’s always wise to check.