Shares Purchased Through Reinvestment in header of articles
Shares Purchased Through Reinvestment in content page of articles
When you open a mutual-fund account, you can receive dividends as cash or have them reinvested. You can also do this with stocks in a dividend-reinvestment program or an employee stock-purchase plan.
Most people reinvest their dividends, which buys more shares. However, when you buy shares through reinvestment, it's like you received the cash and immediately purchased more shares. You must keep track of the basis of each share when you buy them — whether directly or through reinvestment.
Ex: Anita bought 100 shares of a mutual fund for $500 on Jan. 10, 2012. The shares’ basis is $5 per share. On Dec. 15, 2012, Anita receives a dividend of $30, which she used to buy 5 more shares of the same mutual fund. The basis of these shares is $6 per share.
When she sells all her shares, or more than the 100 she originally purchased, she needs to determine which shares had a $5 basis and which a $6 basis. If she assumes she purchased all the shares at the same price (for a $5 per share basis), then she’ll pay more tax than she needs to.