Tax Treatment of Reinvested Dividends
Dividends are a form of income, and as such, they must be reported in your income tax return. They are taxable the same way all earned income is taxable even if they are reinvested in stock and the money does not reach the tax payer directly.
Some companies offer dividend programs where investors may opt to have all dividend payments automatically reinvested back into the company to purchase additional shares. This allows the investor to obtain more stock without having to put more money into the investment.
Even though a taxpayer does not receive a cash distribution or have "control" over it, the IRS still considers reinvested dividends a form of income. This means that you are taxed on your reinvested dividends just as if the company wrote you a check for the dividend payment.
You should receive a 1099-DIV from the company or your broker for use in preparing your tax return. Even if you have not received this form, you are still responsible for reporting the income to the IRS.
Companies occasionally forgo the traditional cash dividend and provide additional company shares of comparable value. This is referred to as a stock dividend.
A stock dividend is different from a reinvested dividend because, with a reinvested dividend, you could get cash for the dividend, but are choosing to reinvest it. With a stock dividend, you are paid with stock directly. This means you may not be taxed in the same way. Taxpayers can defer taxes on a stock dividend until the sale of the stock.
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