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Hello,
I keep reading that DRiPs are a tax nightmare, however, I really want to enroll my stocks in DRiPs to save on transaction costs.

Could someone please explain why DRiPs are such a tax nightmare? Can't I just keep a "cost-average" and then use that number to determine my gain or loss when I buy or sell?

Thanks!
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Could someone please explain why DRiPs are such a tax nightmare? Can't I just keep a "cost-average" and then use that number to determine my gain or loss when I buy or sell?

Thanks!


Some consider it a nighmare because each DRIP event has to be tracked individually for tax reporting purposes, as each dividend reinvestment is an individual stock purchase. Thus, each purchase has it's own per-share purchase price that has to be tracked for purposes of calculating capital gains on each individual purchase.

At least that is the way I understand it. Those more Foolish than I might have other, more enlightening thoughts.

Opv
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Could someone please explain why DRiPs are such a tax nightmare? Can't I just keep a "cost-average" and then use that number to determine my gain or loss when I buy or sell?

Right. But have you considered just what exactly is the "average cost"?

500 shares @ 16.92
1.4563 @ 17.25
1.3423 @ 18.97
0.9452 @ 20.24
2.7458 @ 15.87

What is your average cost? Dollars to donuts not 1 person out of 10 can compute this accurately. Oh yes, those fractional shares are purchased 4 times a year over 10 or 20 years. And don't forget that you have to adjust your basis for the taxes you paid on the dividends throughout your holding period.

It's a nightmare. When my mom went into the Alzheimer's home I had to track down the cost basis for 30 years of PG&E drips. Impossible. Normal human beings cannot keep & maintain accurate records of all these little transactions over half their lifetime.

At least with a mutual fund, they (presumably) can keep track of it for you.
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Could someone please explain why DRiPs are such a tax nightmare? Can't I just keep a "cost-average" and then use that number to determine my gain or loss when I buy or sell?

Others have answered why it "has to" be a nightmare. But an alternative, if you wish to participate in DRIPs, is to do it inside an IRA or a Roth IRA.
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Average cost is acceptable to determine the tax basis for mutual funds - not for regular company stocks.

If you keep a reasonable up-to-date record of the history of your investments, it's not THAT much of a tax nightmare.

Bill
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Hello,
I keep reading that DRiPs are a tax nightmare, however, I really want to enroll my stocks in DRiPs to save on transaction costs.

Could someone please explain why DRiPs are such a tax nightmare? Can't I just keep a "cost-average" and then use that number to determine my gain or loss when I buy or sell?


Hi Rick. Not sure if this is what you want to hear or not but when I was involved in dividend reinvestments over a long period and sold one of the issues I finally said to heck with it and claimed my cost basis as zero and paid full taxes on the sale price minus the basis. It was a lot easier than figuring out all those little fractional shares purchased and dividends paid and repurchases over the quarters/years.

I guess if you were diligent and kept on top of it you could post all this stuff to a spreadsheet. It's pretty nasty.

Regards,

ImAGolfer
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Oh common, you guys. Setting up a spreadsheet and entering the data monthly is no problem, that is if you are familar with spreadsheets. the spreadsheet coming in particularly handy if you want to seel a partial load. The usual thing is last ink first out unless you tell them otherwise in writing.

Also you can have the stock or mutual fund do it for you although some companies have limits on how far they go back (like 10 years).

brucedoe
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The usual thing is last ink first out unless you tell them otherwise in writing

No, the default is first in, first out (FIFO). But otherwise, brucedoe is right: it's not all that hard if you keep accurate records, and that's dead simple to do with a spreadsheet. In that case, it shouldn't take you more than a few minutes to calculate the cost basis of any sale.

(And as others have noted, you can't use an average cost basis - that's only an option with mutual funds. With individual stocks, you have to work out just which shares are being sold, and add up corresponding purchase prices. That's where the spreadsheet comes in. Or, if you wish, a pocket calculator. Either way is easy enough if you have good records.)

Lorenzo
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The usual thing is last in first out unless you tell them otherwise in writing.

I believe that first in first out (FIFO) is the default. Also the broker or whoever must acknowledge to you in writing if another method of calculation is used for tax purposes.
But I agree that if you are diligent in setting up a spreadsheet and entering the data regularly the process is manageable. It also makes the process a bit easier if the entire lot is sold as a single transaction. In this way the short term transactions and long term transactions can each be summarized into a single entry on Schedule D. Since the Schedule D entries are based on total cost paid and total cost received and average cost for each will be the correct entry.
I would not depend on the broker or transfer agent to do what you should have been doing for the past 10 years when you sell.

Bob
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There's a lot of bad info in this thread. I'll reply to each one individually, so this might get a bit long. Sorry about that. Here goes.

Can't I just keep a "cost-average" and then use that number to determine my gain or loss when I buy or sell?

No, you can't. You need to track each DRIP purchase as a separate purchase. You can only use average cost basis with mutual funds.

What you'll need to do is set up a spreadsheet - manual or computerized - with the following columns: date, number of shares, dollars. With the initial purchase and each reinvestment, record a line with the appropriate info. You'll note that nowhere do I have a price per share. That's because you'll be tempted to do all sorts of wrong things with it if it's there. When we need a price per share, we'll do the division to get it. Most of the time you won't need it. (Unless you want it to track the investment performance, but that's a different issue.)

When you sell, you'll add some more columns to the spreadsheet. Namely: date sold, number of shares, dollars. Once again, note the lack of a per share column. You don't need it. To fill out the sale columns, you'll need to prorate your sale proceeds to your purchases, starting with your oldest purchase. When you get to the end, you'll probably need to split up a purchase to match up with the last bit of the sale.

Lastly, you can add a final column to calculate the gain or loss on each separate line. Just subtract the cost from the sale proceeds.

In theory, you'd then report each line of your spreadsheet on your schedule D. In practice, it's fine to summarize, as long as you're careful to watch short-term vs. long-term items.

But you will need to compute each line separately for another reason. If any lines show a loss, you'll need to watch out for wash sales. With a typical stock dividend, you will have roughly one month out of every three where a sale will be outside a wash sale window.

And now, for advanced students, you can use specific identification instead of the FIFO method I've described, providing you can get the DRIP broker to give you written confirmation of your instructions to sell specific lots.

--Peter
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But have you considered just what exactly is the "average cost"?

500 shares @ 16.92
1.4563 @ 17.25
1.3423 @ 18.97
0.9452 @ 20.24
2.7458 @ 15.87


You've got $/share info here. That is the fastest way to confuse yourself with the tax issues around stock sales. Let's correct the presentation of your data first.

Shares        dollars
500.0000 8,460.00
1.4563 25.12
1.3423 25.46
0.9452 19.13
2.7458 43.58
-------- --------
506.4896 8,573.29


So now we can divide and get an average cost of 16.9269 per share.

At least with a mutual fund, they (presumably) can keep track of it for you.

I wouldn't make that assumption. Brokers and mutual fund sponsors tracking cost basis information for their clients is a fairly recent phenomenon. And it's mainly customer service driven. They don't have to do it, but they do to provide an additional service. There are also rumblings in Congress from time to time to start requiring brokers to track and report cost info to the IRS. That's only because technology is finally to a place where that is reasonably possible for most brokers to accomplish.

--Peter
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And don't forget that you have to adjust your basis for the taxes you paid on the dividends throughout your holding period.

I forgot to address this error.

You don't need to make any adjustments for taxes paid. You just need to be sure to get the right facts in the first place. If some portion of the dividend is used for something other than purchasing stock, then it's not a part of your basis.

So if you got a dividend of $100 and the entire dividend was reinvested, it doesn't matter that you had to use some other money to pay perhaps $25 of tax on the dividend. The entire $100 was reinvested, so the entire $100 is part of your basis.

--Peter
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The usual thing is last ink first out unless you tell them otherwise in writing.

No, the default is first in, first out, unless you tell them otherwise. And they - the broker - has to confirm your instructions in writing. You can tell them verbally, they need to confirm in writing.

--Peter
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Keeping accurate records over a period of decades is virtually impossible for normal people. You can't even use any kind of computerized records or computer spreadsheet. The programs to read the data will be obsolete in just a few years time. And all it takes is one time of forgetting to enter a quarterly transaction and you have incomplete data.

DRIPs were an arguable solution for something that was a problem years ago, but isn't anymore. To wit: high brokerage commissions.

It doesn't make much sense to me, either. A DRIP says that you see no better investment than this one company. But this is rarely (never?) the case.

These problems are in direct contradiction to one another.
On the one hand, you'd have to be so lazy that you don't bother to look for better stocks to own---you make a one-decision choice and never revisit it.

On the other hand, you are also so meticulous that you religiously keep track of every divident that is credited to you over a period of many years. In the case of a DRIP, you don't even get a check that you must cash, just a notice that the dividend was paid and how many shares you received in lieu of the cash.

FWIW, my dad was teh first and my mom was the second. She was anal-retentive to a fault in recordkeeping. But after 20 years it was impossible to figure out their actual overall cost basis for their PG&E stock.
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Keeping accurate records over a period of decades is virtually impossible for normal people.

That's nonsense. I have accurate records of all my stock transactions for almost 20 years. My wife has been DRIPing one stock (Southern Company, SO) since the summer of 1980. She has all the paper records neatly filed away, and I put all the data into a spreadsheet about a dozen years ago. That's 28 years worth of data, with splits and spinoffs all neatly factored into the spreadsheet.

And all it takes is one time of forgetting to enter a quarterly transaction and you have incomplete data.

Well, you don't necessarily have to make an entry every quarter. Most companies send out statements when they reinvest dividends, and the statements are cumulative through the year - that is, the last statement of the year shows all four quarterly DRIP transactions. So you don't keep four pieces of paper per year, just one. And if you're a bit lazy, you can make all your entries from just that last statement. But granted - if you can't find 5 minutes a year to write down some numbers and/or file a piece of paper, then you probably shouldn't DRIP.

DRIPs were an arguable solution for something that was a problem years ago, but isn't anymore. To wit: high brokerage commissions.

I think that commissions are a small part of the attraction of DRIPs to many people. They're a painless way to (slowly) build an investment, sort of like buying savings bonds via payroll deduction. (Ok, DRIPs are painless if you keep good records...) My wife's position in SO has grown about 20-fold (I think) since she started. Not all that spectacular, but still it's now a tidy little sum.

DRIPs clearly aren't for everyone. If you can't (or won't) invest the time to keep good records, then buy mutual funds - they typically supply average cost basis information when you sell. Or go with a full-service broker - they'll be only too glad to track cost basis for you.

Lorenzo
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The programs to read the data will be obsolete in just a few years time.

That's just rubbish.

While it is true that technology will advance and programs will become obsolete, it's not going to wreck your data. Programs don't go out of existence overnight. There is a shift over time from one program to another. Even if you only visit your data once a year, you'll be able to migrate your data from one platform to another, probably while having access to both the older and newer technology at the same time.

--Peter
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The programs to read the data will be obsolete in just a few years time.

That's just rubbish.

While it is true that technology will advance and programs will become obsolete, it's not going to wreck your data. Programs don't go out of existence overnight. There is a shift over time from one program to another. Even if you only visit your data once a year, you'll be able to migrate your data from one platform to another, probably while having access to both the older and newer technology at the same time.


Alas, I know whereof I speak. At my job in software development, upgrades of tools & platforms were a major problem. For example, on one large software project we used Interleaf as our documentation tool. http://en.wikipedia.org/wiki/Interleaf Thousands of documents and manuals. As that project finished up, the next project was ramping up. For the new project it was decided to use a different package--FrameMaker. It could not read Interleaf files. After a couple of years and a few hardware upgrades, we no longer had hardware that could run Interleaf. So all that documentation was lost forever. Next project, same story but this time we used Microsoft Word. So now we couldn't read any of our Interleaf *or* FrameMaker documents.

Even in the civilian world, this type of thing happens all the time. Remember all the spreadsheet programs that were around before Excel took over the world?

You also aren't thinking about the personal hardware problem correctly. Got any data on floppy disks? Gone---nothing can read them anymore. At work, we had an entire tape vault with a couple thousand magtapes, of customer systems going back 10 years. After a few hardware & software upgrade iterations, we no longer had the ability to read them.

I can't count the number of time that I have (unexpectedly) upgraded my personal computer---because my old system just flat-out refused to boot up one day.

Got any data on hard drives? When was the last time you backed up your hard drive? I personally have 250GB of important data on a disconnected hard drive on my bookshelf. It used to be in my computer until one day.....click click click "Read error on disk". One hardware glitch and all my data was gone. I still keep the drive for sentimental reasons. Ever once in awhile I plug it in on the off chance that I'll be able to read it and copy my data to a good disk.

Heck, do you even have multiple copies of your important data files in different directories or on different physical disks? A write error when saving a modified file can happen, and if you don't have another copy, you've lost your file. Or even make a silly error and accidently delete an important file, and fail to realise it until days or weeks later when you go to open the file again.

Over a time period of decades, it is quite likely that the law of averages will catch up with you and your data files will get trashed.

Luckily, I keep all my *important* data with pen & paper in a 3-ring binder. But if we ever have a house fire or tornado or flood I'll be SOL, because I don't have an off-site backup. Do you?


Anyway, sorry about the off topic pedantic rant. My major opinion about DRIPs is that they are much ado about almost nothing. The benefits are trivial, and they involve a lot of bookeeping. The game is not worth the candle. ("The returns from an activity or enterprise do not warrant the time, money or effort required.")
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Keeping accurate records over a period of decades is virtually impossible for normal people. You can't even use any kind of computerized records or computer spreadsheet. The programs to read the data will be obsolete in just a few years time. And all it takes is one time of forgetting to enter a quarterly transaction and you have incomplete data.

DRIPs were an arguable solution for something that was a problem years ago, but isn't anymore. To wit: high brokerage commissions.

It doesn't make much sense to me, either. A DRIP says that you see no better investment than this one company. But this is rarely (never?) the case.

These problems are in direct contradiction to one another.
On the one hand, you'd have to be so lazy that you don't bother to look for better stocks to own---you make a one-decision choice and never revisit it.

On the other hand, you are also so meticulous that you religiously keep track of every divident that is credited to you over a period of many years. In the case of a DRIP, you don't even get a check that you must cash, just a notice that the dividend was paid and how many shares you received in lieu of the cash.

FWIW, my dad was teh first and my mom was the second. She was anal-retentive to a fault in recordkeeping. But after 20 years it was impossible to figure out their actual overall cost basis for their PG&E stock.


Your own shortcomings do not apply to everyone else.

We are talking about a Spreadsheet with three columns (6 if you want to keep track of sales) - date, cost and shares. That's a 5 minute activity perhaps monthly (if you have a monthly dividend paying stock). As Lorenzo2 mentioned, one can use the year-end summary to enter and verify the share data.

If you are afraid your software will be obsolete, use one of Web tracking tools (icarra is one).

The was an often-repeated Fool article about how an investor turn a $2000 Pepsi (PEP) stock investment into $150,000+ investment via DRIP. If I recall correctly, about half the shares were accumulated via the DRIP. I am sure there are other similar examples.


Hohum
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For the new project it was decided to use a different package--FrameMaker. It could not read Interleaf files.

Who was the fool that made that decision? Clearly, someone decided that all the old documentation wasn't worth converting - either in time or dollars.

Next project, same story but this time we used Microsoft Word. So now we couldn't read any of our Interleaf *or* FrameMaker documents.

Word can read plain text. Certainly one of those other packages could output to plain text. But again, this was either stupidity at work or a conscious decision by those charged with that decision.

Remember all the spreadsheet programs that were around before Excel took over the world?

Now we're back on topic. And yes, I do. I cut my teeth on VisiCalc. Got an old TRS-80 lying around so I can show you my skilz? ;-) When we switched to Lotus 1-2-3, Lotus read those Visicalc files just fine. And when Lotus got mangled under the Microsoft machine of Excel, Excel read the Lotus files as well.

Got any data on floppy disks? Gone---nothing can read them anymore.

Baloney. The computer I'm typing on at the moment has a floppy drive. It's not an 8 inch floppy from the TRS-80. But we converted those disks to 5 1/4 inch floppies when that format came out. And the 5 1/4s have since been converted to 3 1/2 inch floppies. Now we're moving towards memory sticks as the portable media of choice. And the data on those 3 1/2 floppies has mostly been converted to memory sticks now.

So no, I don't have anything that can read an 8 inch floppy at my disposal. But I kept upgrading my media as the hardware developed over the years. So I don't need to read an 8 inch floppy any more.

At work, we had an entire tape vault with a couple thousand magtapes, of customer systems going back 10 years. After a few hardware & software upgrade iterations, we no longer had the ability to read them.

Again, a failure to plan as hardware changes over time.

Got any data on hard drives? When was the last time you backed up your hard drive?

Yes. And at work we have systems in place to protect from hard disk failures.

I experienced a hard disk failure once. And it cost us a lot of data and unproductive time. But I have only experienced that once. You see, I learned from my mistake. Important data on hard drives in my life is really on two hard drives. I will not have a system without mirrored drives any more. And at work, the backup happens daily. To another completely different computer. And once a week, that backup is copied to ANOTHER hard drive and taken off site. We keep 8 weeks of weekly backups, at least 6 months of monthly backups, and permanently keep an annual backup.

And I'm too lazy to figure out some kind of incremental backup system. So all of those backups are complete backups. Currently, that's about 70GB of data. Per backup. Each day, week, month, and year.

And just to take it a bit further (and since I am an owner of the business) I'll take my personal stuff in to the office and store it there. That way all of the office backup systems are protecting my personal stuff as well.

Luckily, I keep all my *important* data with pen & paper in a 3-ring binder. But if we ever have a house fire or tornado or flood I'll be SOL, because I don't have an off-site backup. Do you?

Yep. In fact, we've been shredding the paper "backup" because it's probably safer being digitized. And a whole lot easier to access.

--Peter <== whose main technology fear now is the demise of the PDF format.
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And I'm too lazy to figure out some kind of incremental backup system. So all of those backups are complete backups. Currently, that's about 70GB of data. Per backup. Each day, week, month, and year.

Hi Peter,

If you do some sort of file copy as your backup like I do, then you might find the program ADCS useful: http://www.heatsoft.com/adcs/ADCSindex.html
It copies whole directory trees between different drives, but will only copy changed files to the target (by comparing file size/timestamps and/or file content). I use it to back up my data to an external drive. They also have an Automatic Synchronizer (http://www.heatsoft.com/has/HASindex.html) that allows you to schedule those backups.

I've been using this for several years now for my 110 GB of data and it works very well. Typically I only need to backup a fraction of the data, around 150 MB each day.

Best Regards,
Bernhard
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--Peter <== whose main technology fear now is the demise of the PDF format.

I never thought about that one. I have had some trouble exchanging .pdf files with others. If the fonts on my system are not the fonts on the receiving systems, problems can ensue. Some are minor -- the results do not look the same and may affect the cosmetics. Some are major -- the results are unreadable. In the most recent event like this, we (Linux user and two Mac users) exchanged .ps (postscript) files instead, and that worked just fine. Since Linux systems use .ps as the default fancy-text format, it might last longer than .pdf. It depends on which you think will last longer: Adobe or Linux. I have no opinion on that.

ASCII may be the best bet.
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ASCII may be the best bet.

ASCII most likely is the best bet. I think it's the best choice for email as well, both to save on bandwidth and because not everyone can receive HTML. As for spreadsheets, I expect that CSV will always work. You lose formatting and functions, but you still have data.

Lorenzo
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Remember all the spreadsheet programs that were around before Excel took over the world?

Yes, and I had plenty of time to convert the important ones to Excel.

Got any data on floppy disks? Gone---nothing can read them anymore.

Nope, as CD's became available I transfered all important data to them back when I had a computer that read floppies and could write CD's. Now I have one that can read/write CD's and DVD's. Guess what? I'm transferring important data to DVD's now. And technically I still have a computer sitting around that does have a floppy drive. And external floppy drives are still commercially available.

Got any data on hard drives? When was the last time you backed up your hard drive?

I do it monthly.

Heck, do you even have multiple copies of your important data files in different directories or on different physical disks?

Yes.
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What you'll need to do is set up a spreadsheet - manual or computerized - with the following columns: date, number of shares, dollars.

Here is what I have done with my stock. There have been no dividends yet, but I am making a monthly deposit of $135, which I will treat exactly like dividends, right?

DATE	SHARES	COST DOLLARS	DATE SOLD	SHARES SOLD	SALE DOLLARS	GAIN/LOSS
6/17/08 15.0130 $1,000.00
7/1/08 2.0642 $135.00


Now, lets say I decide to sell 10 shares. It would look like this now, right?


DATE SHARES COST DOLLARS DATE SOLD SHARES SOLD SALE DOLLARS GAIN/LOSS
6/17/08 15.0130 $1,000.00 7/7/08 10 $664.00 $336.00
7/1/08 2.0642 $135.00


And then, if I wanted to sell 6 more shares, I would first sell the rest of the shares from the first lot (the remaining 5.0130) and then would take the rest from the second lot, right?

When we need a price per share, we'll do the division to get it. Most of the time you won't need it.

How would I do this calculation?


I am a very good record keeper... a bit compulsive and obsessive so I think I should be able to keep track and in a weird sort of way enjoy it. But I want to make sure I START doing it correctly!

Does my setup look correct? Any other observations?

Finally, so now when I sell shares from a lot that has been bought over a year ago, those sales will be long term capital gains, right?


Thanks so much!
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It copies whole directory trees between different drives, but will only copy changed files to the target

I specifically decided against that kind of backup. The issue is that you have only one backup. That works great for a hardware failure. You want to get back to the most current copy of your data as quickly as possible.

But what about user errors? What if you accidentally overwrite your DRIP spreadsheet that has 10 years worth of data in it, with something else - like your kid's homework. You may not notice that mistake until your backup copy has been overwritten with the homework as well. Now where are you?

With the cost of hard drives as low as they are currently, I can't justify cutting that corner. And as far as time is concerned, it starts in the middle of the night and is done before anyone is in the office in the morning. That's all I care about.

Just FYI - that backup takes about 2 hours now. It starts at 1 am and is done about 3 am.

--Peter
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Got any data on hard drives? When was the last time you backed up your hard drive?

I have 6 hard drives in my main computer and 3 in my old one. I do a "full" backup of these every night. Quotes because the data on 4 hard drives of my main machine are backed up separately as they are easily regenerated and they are backed up separately. On the old machine, two of the hard drives are very small (9 GB each).
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Here is what I have done with my stock. There have been no dividends yet, but I am making a monthly deposit of $135, which I will treat exactly like dividends, right?

Yes. Exactly. There really is no tax difference between a DRIP and dollar cost averaging into a stock. They are both simply regular, smaller purchases of a stock. One is funded with the dividends paid by the stock and one is funded from your available investment dollars. But that difference is unimportant from a tax standpoint.

Now, lets say I decide to sell 10 shares. It would look like this now, right?

Close, but not quite. You've got to split that purchase into two lines to correctly calculate the gain/loss. As it is, you're subtracting the cost of 15+ shares from the sale proceeds for 10 shares.

Here's a fix.

DATE SHARES COST DOLLARS DATE SOLD SHARES SOLD SALE DOLLARS GAIN/LOSS
6/17/08 10.0000 $ 666.09 7/7/08 10 $664.00 ($ 2.09)
6/17/08 5.0130 $ 333.91
7/1/08 2.0642 $135.00


And then, if I wanted to sell 6 more shares, I would first sell the rest of the shares from the first lot (the remaining 5.0130) and then would take the rest from the second lot, right?

Correct.

How would I do this calculation? [price per share]

Divide the cost (or sale) dollars by the number of shares bought (or sold).

When you get to real life, this becomes more important. In practice, you need to include the purchase commission in the cost of the stock. If you just use your stated purchase price, you're going to miss the commission. Likewise, on the sale you get to deduct the sale commission and costs.

So if you buy 100 shares of XYZ, Inc. and pay $10 per share, you might try to put $1000 in the cost dollars column. But that forgets about the commission. Instead, if you look at your brokerage statement and see that you paid $1,025 including commissions, you'll get the right result and not pay too much tax when you sell.

Does my setup look correct?

Yes.

Any other observations?

Yes. In your example above, you've got a wash sale. You sold for a loss and had an additional purchase within the 30 days before and after the sale. I didn't address that directly, but there's plenty of information already on the board regarding wash sales.

Finally, so now when I sell shares from a lot that has been bought over a year ago, those sales will be long term capital gains, right?

Right.

--Peter
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Got any data on hard drives? When was the last time you backed up your hard drive? I personally have 250GB of important data on a disconnected hard drive on my bookshelf. It used to be in my computer until one day.....click click click "Read error on disk". One hardware glitch and all my data was gone. I still keep the drive for sentimental reasons. Ever once in awhile I plug it in on the off chance that I'll be able to read it and copy my data to a good disk.

If the bookshelf is in the same room as the computer, I highly recommend that you move the hard drive to an offsite location. You could lose both your computer and backup hard drive to a fire or theft.

PSU
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Does my setup look correct? Any other observations?

Finally, so now when I sell shares from a lot that has been bought over a year ago, those sales will be long term capital gains, right?


Thanks so much!


Don't forget to factor in your transaction costs.

Many brokerages do not charge a fee for the DRIP, but others do.

Otherwise, it looks good.

One other enhancement for later, you could change the text color or font in the purchase column as a given lot of shares are sold. That way, you have an idea which lot of shares are involved in the next sale transaction.

Yes, shares held over a year are long term capital gain (or loss)



Hohum
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If the bookshelf is in the same room as the computer, I highly recommend that you move the hard drive to an offsite location. You could lose both your computer and backup hard drive to a fire or theft.

PSU

__________________________________
OR a flooded basement.

Bill
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Peter (and others),
Thanks so much!!

Just a few things that are still cloudy:

First, as to commissions. In the above example, I had a $10 commission fee for my first purchase and no fee for the second one. So the $1000 price listed first includes the $10 fee. So actually I bought stock with $990 and the other $10 went to the broker. I think you were saying this is the way to do it, right?

Next, so everytime I decide to sell shares, if I have to break into a new lot and don't use the whole lot, then I have to divide that lot into two? Again, just trying to clarify. So in our example, if, after selling all of lot 1 I wanted to sell 1 more share, I would then have to divide lot 2 into two lines (one line with 1.0642 that remains unsold, and a line above that for 1 share with sold information).


Finally, as for the wash, since I have a recurring $135 monthly deposit set up, will I always have a wash? Should I set this payment to bi-monthly to take advantage of some losses?

Thanks for helping me through this!
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To rayvt who tried to find the cost basis or his parents' PG&E shares. Note: The dividends in 1983, 1984 and 1985 could have a zero cost basis due to the utilities' dividend repurchase tax exemption for up to $1,500 of utilities' dividends in those 3 years. It gets even more complicated if more than one utility was involved and the total exceeded $1,500. When you sell any shares, the shares representing the "exempt" dividends' are sold first (regardless of other FIFOs)and their basis is zero.

To the OP. Notice no one in 48 posts has advocated or extolled the virtues of DRIPS. Long ago I quit the DRIPS and had the company issue a certificate for the DRIP shares so I now know the basis for that total amount of shares and can sell them, or part of them, or the original shares, without the gyrations or loss of records. In one case I had the company issue individual certificates for shares representing certain years of DRIPS so I can sell shares with different basis without further "specific identification". I just pick which certificate to surrender through my broker. In case my caretaker has to sell, I wrote the basis on each certificate. Since I live in a Community Property State, if I die everything gets a step-up in basis, making all this redundant.

ed
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First, as to commissions. In the above example, I had a $10 commission fee for my first purchase and no fee for the second one. So the $1000 price listed first includes the $10 fee. So actually I bought stock with $990 and the other $10 went to the broker. I think you were saying this is the way to do it, right?

Given those facts, showing $1000 as the cost of the stock is correct.

Next, so everytime I decide to sell shares, if I have to break into a new lot and don't use the whole lot, then I have to divide that lot into two?

Correct. And you may have to divide the lot into more than two pieces if it takes 3 or more sales to fully dispose of a lot.

Again, just trying to clarify. So in our example, if, after selling all of lot 1 I wanted to sell 1 more share, I would then have to divide lot 2 into two lines (one line with 1.0642 that remains unsold, and a line above that for 1 share with sold information).

Yes.

Finally, as for the wash, since I have a recurring $135 monthly deposit set up, will I always have a wash?

Yes.

Should I set this payment to bi-monthly to take advantage of some losses?

That won't cut it. You have to look forward AND backward 30 days from the sale at a loss to test for wash sales. Quarterly purchases would give you roughly one month long windows every quarter to sell at a loss and not have a wash sale.

An alternative idea would be to try to anticipate sales that generate a loss. If you want to sell and will have a loss, stop your automatic purchases, wait 31 days from the last purchase to sell, then wait an additional 31 days before restarting your monthly purchases.

Finally, if you're selling a lot of shares in comparison to your monthly purchases, you might just deal with the wash sale. You'll only lose out on the losses to the extent you repurchase shares. So if a few years from now you want to sell 100 shares that will generate a loss and your regular monthly purchases are 5 shares, you'll still get to claim the loss on 90 of the 100 shares sold. That may be preferable to monkeying around with your automatic plans.

--Peter
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Does my setup look correct? Any other observations?

My spreadsheet is similar, but there's one important difference: I put only one
transaction on a line.  With yours, you have a purchase (of 15.013 shares) and
then a sale of 10 of those shares.  Where are you going to enter the sale of the
remaining shares?  Also, with multiple things on a single line, I think it would
be easy to lose track of what's been done - in your case, the fact that there are
still 5.013 shares remaining from that first lot. 

My spreadsheet would do it like this:

  Date      Buy       Cost       Sell      Price     Basis     Gain/Loss

06/17/08  15.0130   1,000.00
07/01/08   2.0642     135.00
07/07/08                       10.0000     664.00    666.09      -2.09
 
(I, too, have ignored the fact that you have a wash sale...)

So with a buy, I enter the date, the number of shares acquired, and the cost.
With a sale, I enter the date, the number of shares sold, and the net price.

In my spreadsheet, it's easy to see what your present position is: the number of
shares you currently hold is just the sum of column B minus the sum of column D.
(In fact, that number is published at the top of the sheet.)

The tricky bit is calculating the numbers in bold above.  Years ago, I worked it
out with a combination of spreadsheet functions and a calculator.  These days,
I do it with a macro:  I push a button and the numbers in bold appear.  And as
a bonus, the following entry is also made on a worksheet called SchD:

10 XYZ     06/17/08    07/07/08     664     666    -2    short term

You should recognize that as the format used in Schedule D: description of
asset, date acquired, date sold, price, basis, and gain/loss.  If it's short
term, you see the annotation to the right.  So when my last sale of the year
is made, my Schedule D is done. 

Lorenzo

(If anyone is interested, I'd be happy to send a copy of my spreadsheet, nifty
macro included.  I have both Excel and OpenOffice versions.  But a couple of
caveats: I use FIFO only, and I don't check for wash sales.  If you have a 
wash sale, you have to spot it yourself and make the necessary adjustments
to basis and Schedule D.)
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Lorenzo, I'd be very interested in the excel version. My email is rkt2@calvin.edu

Thanks!
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And I'm too lazy to figure out some kind of incremental backup system. So all of those backups are complete backups. Currently, that's about 70GB of data. Per backup. Each day, week, month, and year.

I specifically said "normal people". That probably excludes 90% of us here.

If you do some sort of file copy as your backup like I do, then you might find the program ADCS useful

I use Microsoft's free "SyncToy" program. It has all the options anyone would need. I also am a bit paranoid of hardware problems----from 3 decades of expereiencing them firsthand & secondhand. So my backup is to another computer running Linux, onto a RAID-5 array. I use software RAID, not hardware RAID, to avoid the risk of being unable to replace a bad controller card that has become obsolete. Over the years, I have amassed a large collection of various controller cards that are now orphans.

I no longer consider a different directory or different physical disk to be adaquate. Not since I had a motherboard fail suddenly one evening, to bnoot up nevermore. Not since we had a momentary power glitch which caused my wife's computer to reboot. Actually... attempt to reboot----somehow the OS managed to get corrupted and I had to re-install Windows.

But I'm not a normal person, either.
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But what about user errors? What if you accidentally overwrite your DRIP spreadsheet that has 10 years worth of data in it, with something else - like your kid's homework. You may not notice that mistake until your backup copy has been overwritten with the homework as well. Now where are you?

In this case, you are SOL.

Which is why I use one of the little-known "vfs object = recycle" option in Samba on my Linux fileserver. Any file that gets deleted from what WIndows sees as the shared directory actually gets moved to the ".deleted" directory instead of being deleted. It's better than the Windows trashcan.

I think that continually re-writing unchanged files is somewhat dangerous. Every time you write data you are taking a (small) risk. That's why I don't defrag any of my data disks. The safest thing would be a sync program that would go not by the timestamp/size, but by comparing CRCs or MD5s or something. But I'm not aware of anything free that does this.
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Finally, as for the wash, since I have a recurring $135 monthly deposit set up, will I always have a wash? Should I set this payment to bi-monthly to take advantage of some losses?

I don't get something here. Wash sale rules only apply when you sell shares. But you set up a DRIP because you have decided that you always want to automatically *buy* shares. Why would one decide to contemporaneously both buy and sell shares?

I view a DRIP as a "one decision" issue. You set up to automatically buy, and never have to thing about it or take action; it's all done for you.

And usually, you decide to sell for only a couple of reasons:
1) You decide that the stock is a SELL.
2) You need to liquidate some shares to get cash.
3) Your position has grown too large, so you sell some shares to rebalance your portfolio.

Only in the 3rd case would you continue the DRIP purchases.
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I'd be very interested in the excel version.

I'll send it to you in a day or two. It's on another computer just now. And I need to tidy it up a bit - at the moment, I'm the only one who uses it, and I can tolerate a few of its idiosyncrasies.

Also, I see that you're fairly new here. The problem with putting your email address in your post, as you've done, is that it's now out there for all to see, including bots that crawl sites like this, looking for email addresses - for spam and who knows what other evil purposes. The better approach is to respond to a post and check the box that says to email the reply to the author. In that case, I get an email showing your address, and it's not posted in public. (Of course, you have to trust that I won't then do something evil with your email address!)

Anyway, sit tight...

Lorenzo
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Thanks Lorenzo. I was careful about which email I gave you... that email address expires in a month so I'm not too worried.

As for your comments about a wash in a DRiP program, you are right. I really have no intention of selling anytime soon. But I want to make sure I record every reinvestment and dividend reinvestment in the correct format so that when I do sell years down the road it won't be a nightmare.
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Peter,
Once again, thanks so much for walking me through this. If you don't mind, I'd like to go over one last example to make sure I fully understand this.

First, a little background. So I signed up for TD Ameritrade because of 30 days of free trading. My first purchase was one for 58 shares at a price of 1984.76. Six days later I bought 3 more shares at 94.17. I then proceeded to sell 37 shares at four different trading prices, all for a profit. Since I made four sells, I divided my spread sheet like so:

DATE SHARES COST DOLLARS DATE SOLD SHARES SOLD SALE DOLLARS GAIN/LOSS
6/5/08 21 $718.62
6/5/08 15 $513.30 6/18/08 15 $520.49 $7.19
6/5/08 10 $342.20 6/18/08 10 $349.19 $6.99
6/5/08 5 $171.10 6/18/08 5 $174.79 $3.69
6/5/08 7 $239.54 6/19/08 7 $251.99 $12.45
6/11/08 3 $94.17


So, as you can see, the initial 58 shares I bought on June 5 weredivided up.

Now, I think I did that right, but here is where it gets a bit cloudy for me. The next few weeks the stock went down quite a bit, so my next sell on July 1 was for a loss based on my first lot of shares:


DATE SHARES COST DOLLARS DATE SOLD SHARES SOLD SALE DOLLARS GAIN/LOSS
6/5/08 7 $239.54
6/5/08 15 $513.30 6/18/08 15 $520.49 $7.19
6/5/08 10 $342.20 6/18/08 10 $349.19 $6.99
6/5/08 5 $171.10 6/18/08 5 $174.79 $3.69
6/5/08 7 $239.54 6/19/08 7 $251.99 $12.45
6/5/08 14 $479.08 7/1/08 14 $381.63 -$97.45
6/11/08 3 $94.17


Now, even thought this last trade was for a loss, I can't deduct it because of the wash rule, right? So I still have to pay taxes on my gains from the previous 4 trades and I CAN'T deduct the loss of my 5th trade?


If this is true, looking back it kinda makes that last trade look stupid. HOWEVER, actually between June 12 and July 1 I made many purchases that were lower than that selling price, so if I were to use those lots instead of that first lot, that last trade would be for a gain. But I am doing FIFO, so I think I did it right based on that.


Finally, I remember you saying that I should not use price per share as it is often misused. However, don't you have to use a price per share number when you divide a lot up? Like, for my first lot, I initially had 58 shares. But to divide it up, I had to divide 1984.76 (what I paid for all 58 shares) by 58 so that I could know what the lots were worth once divided. This is okay, right (comes out to 34.22/share)?


Sorry for the questions and long post, this has been so helpful! And I don't plan on ever trading this much, but I just wanted to get a taste of it while I had my 30 days free trading!!

Thanks so much!
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You guys are having so much fun intellectualizing here that I almost hate to inject a simpler solution. But here goes.

In 1995, I inherited a big chunk of GE from my father which was held in a DRIP. I left it in the DRIP for about three years, with the dividends being reinvested, before I finally transferred the stock to my broker and started taking the dividends.

I have too large a percentage of my stock portfolio in GE because it's been so highly appreciated (until the recent unpleasantness) that I didn't want to take a big tax hit. But I sell off a little every now and then as taxes permit.

To track the capital gains, I have simply input every transaction into Quicken, which took me on average about ten minutes a year. And I've saved a hardcopy consisting of one sheet for any year in which I had any transactions.

I've updated my version of Quicken only once since 1995, and all data transferred beautifully. And I keep two backup copies of my Quicken data on DVD apart from my hard drive.

I told Quicken to use FIFO which may have cost me a tad extra in taxes, but not much. It was so much easier than trying to tell my broker which of those small-lot reinvested dividends I wanted to sell. So now Quicken prints me a pre-defined capital gains report whenever I ask.

I've heard that Quicken isn't always accurate on complex transactions, but this doesn't seem too complex to me, (the previous discussion notwithstanding). Am I being naive to think that Quicken is giving me the correct cost basis -- assuming I've input the data correctly?
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I have too large a percentage of my stock portfolio in GE because it's been so highly appreciated (until the recent unpleasantness) that I didn't want to take a big tax hit.

Just curious: Did the recent unpleasantness cost you more than the tax hit would have?

--fleg
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OR a flooded basement.

Voice of experience, maybe?

;^D

~~ Alison
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"OR a flooded basement."
________________________________
Voice of experience, maybe?

;^D

~~ Alison

________________________________

Not first-hand, fortunately.

We did have a wet basement after heavy rains lately.
But that was nothing compared to the problems of our niece and her husband, who live in Cedar Rapids IA, and had their basement and first floor completely flooded.

Bill
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Now, even thought this last trade was for a loss, I can't deduct it because of the wash rule, right? So I still have to pay taxes on my gains from the previous 4 trades and I CAN'T deduct the loss of my 5th trade?

The purchase on June 11 is within 30 days of the July 1 sale at a loss. So you do have a wash sale.

However, you sold 14 shares and only purchased 3. So the loss on 3 shares will be deferred and added back into the basis of the June 11 purchase. The balance of the loss is deductible.

If you want to talk further about wash sales, I'd suggest starting a new thread for that. You may get more attention that way.

--Peter
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Cedar Rapids IA, and had their basement and first floor completely flooded.

Yikes!

Hope they're doing okay.

~~ Alison
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If you are worried about losing your computer information backups to fire or something, you can get a safe. Many of these have considerable resistance to fire. Perhaps it is not a perfect solution, but it is something.

brucedoe
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I wish to thank everyone, and particularly tireless Peter, for the excellent discussion on DRIPs and taxes. I haven't sold out a DRIP stocks in quite a number of years, but am sure I did it wrong concerning wash shales. As I sold out the whole thing, I believe I just added up everything and let it go at that. Fortunately, I wasn't audited. I suspect the difference wouldn't have been much.

Oh, there were a few missing months of records so I just used a purchase price of zero. Tried to be as honest as I knew how. The monthly DRIP was small so assuming zero didn't hurt much. Maybe that made up for not doing wash sales? Doubt IRS would have bought that.

Someone mentioned their wife is DRIPping SO. My wife did too and there are all sorts of missing records. And SO can't provide records going back past a certain year (I think 10 yrs). So I've told my wife that we can never sell the stock. Fortunately, it is a good company and our heirs will get a new basis. We no longer DRIP it and like the income.

brucedoe
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Someone mentioned their wife is DRIPping SO. My wife did too and there are all sorts of missing records. And SO can't provide records going back past a certain year (I think 10 yrs). So I've told my wife that we can never sell the stock.

Assuming you can afford it, I believe there is another option: give the stock to a501(c)(3) charity. I believe you can take the current value as a tax deduction, and the charity can either keep the stock or sell it.

My grandmother got me 10 shares of a mutual fund (I forget which, but I think it was called Colonial Equities). IIRC, they paid a dividend every month and I had the dividends reinvested. I finally got tired of it, and did not want to pay $100 or so "research charge" to get my records restored (records lost during a move), so I just donated them to a charity I liked instead.
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