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Is there a special way of computing the cost basis of stock purchased with dividends - an individual has alread paid tax on that money, then buys more stock - can the cost basis be stepped up, because the money has already been taxed once?
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The cost basis of the new shares is the amount of the reinvested dividends that were used to buy those very shares. That way, you won't be taxed twice on those reinvested dividends. [And the purchase date of those new shares for the holding period is the payment date of that particular dividend.]
Something of a paperwork nightmare, but that's what you have to do if you're working with a DRIP.
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