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In general, the cost basis for shares bought through dividend reinvestment is pretty straightforward. Potentially a lot of record-keeping, but straightforward nonetheless.

Unfortunately, most any time you do dividend reinvestment you end up with partial shares. So, if I have a partial share, or more accurately several partial shares that make up a full share, how is the basis determined?

Let's say in the first quarter of reinvestment, I get .25 (a quarter) of a share. Let's say the share price at the time is $4 (just because the math will be easier that way :). The second I get another quarter-share at a share price of $8, the third another at $12 and finally in the fourth quarter I've got a full share with my final quarter coming in at $8.

For the sake of simplicity, I'm not even going to deal with the shares in the plan that would have to be sold first under FIFO or the fact that the amount of the share would probably vary somewhat over the course of the year. The principles should stay about the same.

So at the end of the year, I want to sell this brand-spanking new share because the share price has rocketed to $20. So what's my basis? Do I take the value of each quarter at the time it was purchased (or $1, $2, $3 and $2 respectively) for a total share price of $8, making my gain $12? Or is there some other method that should be used?

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