Stock Dividends increase cost basis?

Certainly.

Your cost basis is the amount you've paid tax on. When you initially buy a stock for $1000, you pay with after-tax dollars. To ensure you don't get taxed twice, you are deduct your cost base from the proceeds of a sale in determining your taxable income.

When you reinvest a $10 dividend, you pay tax on the dividend, even though you don't get any cash. Your cost base increases, because you've now paid tax on $1010 of your investment. Without this adjustment, you would be taxed twice on the dividend -- once when it's reinvested, and again when you sell.

Maybe you're thinking about dividend reinvestment. Typically, mutual funds allow you to choose dividend reinvestment. Some common stocks offer it too.

Each time you reinvest dividends, there are actually two transactions happening:

1. You receive a dividend of (say) . The dividend is subject to income tax (unless it's, like, a muni bond mutual fund).
2. You invest the in the same security and get extra shares. You now have 100-plus-extra shares. The 100 shares still have 00 basis. The extra shares have basis.

Wait a second - The OP never said anything about reinvestments of the dividend. He simply said he received a dividend. In his scenario, there is no cost basis increase. He is taxed of course on the dividend, but the original number of shares stays the same with the original cost basis.

As Andrew noted, you didn't mention anything about dividend reinvestment to buy new shares. But that's what it sounds like you're talking about. Are you?

No dividend reinvestment. The dividends go to the cash part of the account. This particular account is an IRA, no taxes yet, but i sort of see the logic on the dividend taxing thing applying to the cost basis.

I guess my only problem is that in the purdy graphs[1], i can't see how much i've actually invested.

[1] I can't believe after 10 years that the graph engine still suffers that single-threaded-broken drawing algorithm at it's heart.

dik

Also sprach "DP" -- Fri, 15 Dec 2006 20:23:44 -0600:

Dick - You have several different items playing here. First, then if you are simply parking the dividends in a cash account, then the cost basis will not increase as I previously mentioned, so you should never have been seeing any increase or worrying about it in the first place.

But NOW you mention we're dealing with an IRA account; all sorts of different rules. Assuming you're talking about a regular IRA (vs. a Roth), then any ultimate withdrawals from this stock account (original value plus any reinvested dividends) are taxed as ordinary income anyway, and the whole subject of cost basis gets thrown out the window anyway. Cost basis is generally $0. You took your deduction from your earned income earlier when you funded the IRA to purchase the original stock, right? So none of the money that you will be ultimately withdrawing has ever had taxes taken, thus no cost basis to worry about. (There's the good ness of the Roth IRA, but that's a whole different subject).

btw, I'm not a tax pro, so all information provided is worth what you paid me for.