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Author: gurdison Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 122051  
Subject: Re: Help!! Girlfriend kept no records! Date: 3/23/2003 6:20 PM
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<Also, am I correct in thinking that you don't need to pay capital gains tax on dividends that you re-invest?>

You are greatly confusing the terminology. All dividends are taxable income that needs to be reported. It has nothing to do with capital gains. The only exceptions are if they were specifically tax free investments (ie: muni bonds, etc), or if some portion of the dividend was a non taxable return of capital (most common in REITs, but it can happen with others too). The mechanism for doing this should be through a 1099 from the place where the shares were being held. The 1099 should provide enough detail on what is being reported to the IRS. As an aside, this should have been going on for all the years that she has been investing. You may want to take a look at some prior year returns to see if you can make some sense of things.

Likewise all of the sales (including partial share sales), both in 2002 and prior years are taxable events. Whether there are gains or losses and whether they are LT or ST is something that needs to be determined. Any reinvestment of dividends should be added to the original cost basis. You also need to account for any spilts (standard or the more recent variety of reverse), spinoffs, special distributions, etc. All of those will effect the cost basis too.

It is hard to tell from your post if this is a small or large dollar amount. Regardless, even if one is going to be a passive investor it pays to develop a good understanding of how taxes work WRT investments. Keeping a good paper trail is really essential. If you go through enough quaterly statements, you may find enough to get started. Please don't tell us she threw out all of the statements.

On a personal note, I don't know if you should be congratulated or pitied for volunteering to work in such a potential mine field.<grin> I hope that being forced to ask some difficult questions will not negatively impact the relationship. If it gets too rough, you may want to recommend a tax pro at least until everything is straightened out. Good luck!

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