Hello chadpatrick
" I believe that also affects the cost basis of the stock you purchased. Since you paid tax on that dividend, you can subtract it from the purchase cost of your new stock when it comes to reporting Taxes on that new stock if/when you sell it. "
Reinvesting taxable dividends in a stock does not reduce your cost basis.
If you buy xyz 100 shares for $5 your basis is $500 reinvest dividend of $25 @5/share you now have 105 shares with a basis of $525.It is just like you bought more stock with money from your paycheck.
Quote the IRS:The basis of stock must be adjusted for certain events that occur after purchase. For example, if you receive more stock from nontaxable stock dividends or stock splits, you must reduce the basis of your original stock. You must also reduce your basis when you receive nondividend distributions (discussed in chapter 1). These distributions, up to the amount of your basis, are a nontaxable return of capital.
I know it gets screwy but what do you expect from the Govt.
Good luck
Dividends are taxed http://www.irs.gov/publications/p550/ch01.html#d0e4481
Ordinary (taxable) dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of a corporation and are ordinary income to you. This means they are not capital gains. You can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation tells you otherwise. Ordinary dividends will be shown in box 1a of the Form 1099-DIV you receive.
Qualified dividends are the ordinary dividends that are subject to the same 5% or 15% maximum tax rate that applies to net capital gain. They should be shown in box 1b of the Form 1099-DIV you receive.
Qualified dividends are subject to the 15% rate if the regular tax rate that would apply is 25% or higher. If the regular tax rate that would apply is lower than 25%, qualified dividends are subject to the 5% rate.
To qualify for the 5% or 15% maximum rate, all of the following requirements must be met.
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The dividends must have been paid by a U.S. corporation or a qualified foreign corporation. (See Qualified foreign corporation later.)
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The dividends are not of the type listed later under Dividends that are not qualified dividends.
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You meet the holding period (discussed next).
Holding period.
You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock will not receive the next dividend payment. When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. See the examples, later.
I know it gets kind of screwy but what do you expect from the Govt