How are Reinvested Dividends Taxed in my Brokerage Account?

Thanks for this explanation. I'm still a bit confused though. Let's say I receive $100 in dividends that gets reinvested to buy more shares. I pay taxes on that $100 this year. Then in 5 years those specific shares are worth $150 and I sell them. I'd only pay capital gains on the $50 difference, right? Does my brokerage automatically keep track of which shares came from dividends vs which I purchased directly?

You got it exactly right! You'll pay tax on the $100 dividend in the year you receive it, and then later you'll only pay capital gains tax on the $50 appreciation when you sell those specific shares. Most brokerages do track this automatically now through what's called "lot accounting." When you view your positions, you should be able to see different "lots" of shares with different purchase dates and cost bases. If your brokerage offers good tax reporting, they'll include this information on your year-end tax forms. Just make sure you've selected a tax lot identification method (like specific identification or FIFO) that works for your tax strategy.

Does this actually work with different brokerages? I've got accounts at Vanguard, Fidelity, and an old E*Trade account, and they all seem to have different ways of reporting reinvested dividends.

I'm skeptical about any tax AI tool. How does it handle dividend reinvestment from before 2012? My broker doesn't have good records before then when they weren't required to track cost basis.

Yes, it works with all major brokerages including Vanguard, Fidelity, and E*Trade. It can identify and standardize the different reporting formats they use, which saved me tons of time since I also have multiple accounts. For pre-2012 dividend reinvestments, it actually has a specific feature for this. You can either upload old statements if you have them, or it can help reconstruct a reasonable cost basis using historical dividend and price data for that security. I had some AT&T stock with dividends reinvested since the 90s and it was able to rebuild my cost basis history pretty accurately.

How exactly does this Claimyr thing work? Does it just keep dialing the IRS for you or something? I don't understand how it gets you through when nobody else can get through.

This sounds like complete BS. There's no way to "skip the line" with the IRS. They're understaffed and everyone has to wait. Paying some service isn't going to magically get you to an agent faster than anyone else. If it actually worked, everyone would use it and then it wouldn't work anymore.

It uses an automated system that navigates the IRS phone tree and keeps your place in line so you don't have to stay on hold. When it gets an actual agent, it calls you back and connects you. It's not "skipping the line" - you're still in the same queue as everyone else, but you don't have to sit with a phone to your ear for hours. I was also dealing with a cost basis question for some dividend reinvestments that were flagged in an audit, and I needed clarification on how to document some older transactions. Getting through to an actual IRS agent helped me resolve it in one call instead of exchanging letters for months.

Wait really? I actually have some dividend stocks in both my regular brokerage account AND in my Roth IRA. So for the ones in the Roth, I don't report those dividends at all on my taxes? Even if they're reinvested?

Correct! In a Roth IRA, you never pay taxes on qualified dividends or capital gains - whether you reinvest them or not. That's the huge advantage of Roth accounts. For your regular brokerage account, you still need to report and pay taxes on all dividends in the year they're issued. But in your Roth IRA, you can ignore dividends for tax purposes completely. The brokerage won't even send you a 1099-DIV for the Roth account because those dividends aren't taxable.

Foreign dividends have an extra wrinkle - they're often subject to foreign tax withholding (typically 15% for Canadian stocks if held in a regular account). The good news is you can claim a foreign tax credit for those withheld amounts on your US return. When the dividends are reinvested, the same basic rules apply - you pay US tax on the gross dividend amount in the year received, and those reinvested shares have a cost basis equal to the amount invested (after any foreign withholding).

This is such great advice about record keeping! I wish I had started doing this from the beginning. I'm a complete newcomer to dividend investing and just set up DRIP on a few stocks last month. Your spreadsheet idea sounds perfect - simple but comprehensive. Quick question though - when you say "price per share" in your tracking, do you mean the price on the dividend payment date when the shares were actually purchased? I want to make sure I'm recording the right cost basis information from the start so I don't run into problems later when I sell. Also, has anyone had issues with TurboTax importing the 1099-DIV correctly? I'm using Schwab and want to know if their integration typically works smoothly.