How are common stock dividends on preferred stock reported for taxes?

Hey folks, I could use some tax advice on this situation. I invested in some preferred stock for a company that gives quarterly dividends either in cash or as common stock shares. This past October, I received my first dividend payment but it came as common stock instead of cash. I'm pretty sure I need to report this on my tax return, but when I called the transfer agent they told me no tax forms would be issued for 2024 unless... well, they didn't really finish explaining. I'm confused about how to properly report this stock dividend since I'm not getting any official documentation. Does anyone know how these in-kind dividends are supposed to be handled for tax purposes? Do I need to calculate the value myself? This is my first time dealing with dividends paid as stock instead of cash, so any guidance would be really appreciated!

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18 comments

Christian Burns

•8M

You're dealing with what's called a "payment-in-kind" or PIK dividend. These dividends are indeed taxable in the year you receive them, even without receiving a 1099-DIV form. For tax purposes, the value of your stock dividend is the fair market value of the common shares on the distribution date. You'll need to report this as dividend income on Schedule B and Form 1040. The transfer agent might not issue tax forms if the total dividends for the year are below the $10 reporting threshold, but you're still required to report all dividend income regardless. I suggest keeping good records of the distribution date, number of shares received, and the stock's closing price on that date. This gives you the total value to report. Also, this value becomes your cost basis for these new shares for when you eventually sell them.

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Christian Burns

•8M

Whether the dividends are qualified depends on how long you've held the preferred stock and the specific characteristics of the dividend. Generally, dividends can be qualified if you've held the shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. The fact that they're paid as common stock instead of cash doesn't affect the qualified status - it's about the holding period and the nature of the company issuing them. If they meet the qualified dividend criteria, they'll be taxed at the more favorable capital gains rate rather than as ordinary income.

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Muhammad Hobbs

•8M

I had almost this exact situation last year with a REIT that gave me stock instead of cash dividends. I was so confused because I never got any tax forms either! I used https://taxr.ai to help me figure out the reporting requirements and it saved me a ton of headache. The tool analyzed my brokerage statements and confirmed exactly what Profile 8 said - you need to report the fair market value as of the distribution date. The coolest part was that it also helped me calculate my new cost basis for those shares which I wouldn't have thought about until I sold them later. It even generated a nice PDF report I could keep with my tax records in case of an audit. Might be worth checking out if you're uncertain about how to document everything properly.

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Muhammad Hobbs

•8M

The tool handles pretty much all investment income - dividends, capital gains, interest, even crypto transactions. It can process 1099-B, 1099-DIV, 1099-INT and more. It's especially helpful when you have multiple accounts or complex situations. For pricing data, it uses official market closing prices from recognized exchanges. You can also manually override any values if your broker reports something different. I had that exact issue with a thinly-traded preferred stock, and the tool let me input the specific price from my statement instead of using the default value.

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Diez Ellis

•8M

Update on my skepticism about taxr.ai - I actually tried it last night after posting here. I have to admit I was impressed. I had a similar situation with stock dividends from a Master Limited Partnership and the tool immediately identified the correct tax treatment. It even flagged that some of my MLP distributions might be return of capital (which reduces basis rather than being immediately taxable). This wasn't obvious from my brokerage statement at all! Now I'm going back through previous years to see if I've been reporting things correctly. Definitely more sophisticated than I expected.

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Vanessa Figueroa

•8M

If you're still waiting on clarification from the transfer agent, you might want to try contacting the IRS directly. I know, I know - getting through to them is practically impossible these days. After spending hours on hold last tax season, I found https://claimyr.com and their service was a game changer. You can watch how it works here: https://youtu.be/_kiP6q8DX5c They basically hold your place in the IRS phone queue and call you back when an agent is about to answer. I got through to a real IRS person in about 45 minutes (without sitting on hold) who confirmed exactly how to report my dividend reinvestment program shares. Sometimes getting official confirmation straight from the IRS is the only way to be 100% confident, especially with unusual situations like stock dividends.

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Vanessa Figueroa

•8M

It actually uses an automated system that navigates the IRS phone tree and waits in the queue for you. When an agent is about to pick up, it calls your number and connects you directly to the agent. No redialing needed - it just handles the hold time so you don't have to. The key with IRS agents is asking the right questions. You're right that not every agent knows every rule, but if you get someone in the investment income department, they're usually quite knowledgeable. I always ask to be transferred to a specialist if my question is complex. In my experience, getting the official answer directly from the IRS provides peace of mind, even if occasionally you need to call back for a second opinion.

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Sadie Benitez

•8M

I need to eat my words about Claimyr and the IRS. After my skeptical comment, I decided to try the service myself. Got connected to the IRS investments department in about 35 minutes (which is miraculous compared to my previous 2+ hour waits). The agent I spoke with was surprisingly knowledgeable about stock dividends. She confirmed that payment-in-kind dividends are valued at fair market value on distribution date, and explained that the transfer agent isn't required to issue a 1099-DIV if the total dividend value is under $10 for the year. She also pointed me to a specific section in Publication 550 that covers this exact scenario. I'm honestly shocked at how helpful this was.

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Drew Hathaway

•8M

One thing no one has mentioned yet - make sure you're calculating your cost basis correctly for the new shares. The dividend amount you report as income becomes your cost basis for the common shares you received. Also, check whether your preferred shares are from a qualified foreign corporation. That can affect whether your dividends qualify for the lower tax rate. I learned this the hard way last year when I had Canadian preferred shares and messed up the reporting.

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Drew Hathaway

•8M

Yes, you should definitely track each distribution as a separate lot with its own cost basis and acquisition date. This becomes important when you sell, as you'll want to identify which specific shares you're selling to optimize your tax situation. Most brokers these days track this automatically in their systems, but it's good practice to keep your own records as well. I use a simple spreadsheet with distribution dates, number of shares, price per share on that date, and total value. It takes a little effort, but it makes tax time much easier, especially if you hold these investments for many years.

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