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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.]]

Agreed...

[[ 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?]]

More recordkeeping...each partial share is purchased at a different price, at a different date.

[[ 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.]]

Right...no problem. I assume that your dividends were reinvested as follows:
1st Q = \$1
2nd Q = \$2
3rd Q = \$3
4th Q = \$2 (you say that the share price is \$8 in the 4th quarter...is that really what you wanted to say??)

[[ 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.]]

Thanks for keeping things simple. But in real life, if you were selling partial shares, you WOULD have to deal with these issues.

[[ 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?]]

Nope, you got it. We agree on our basis computations (ignoring the FIFO issues). So your basis would be \$8, and your gain would be \$12.

Again, fairly straightforward, but just taking more time and recordkeeping.

Remember that it is the dividends received that are the focus on the basis. If you REALLY want to make your life easier, you simply sell the entire shares in your DRIP plan. Then your accounting for basis is very easy: Your original puchase plus your reinvested dividends over the years. Regardless of the number of shares sold.

But when you go off and sell partial shares, you are just giving yourself problems and hassles.

We discuss this issue in a bit more detail in The Motley Fool Investment Tax Guide.

TMF Taxes
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