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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120805  
Subject: Re: Dividend Reinvestment - A Tax Nightmare? Date: 7/7/2008 11:52 AM
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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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