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Posted by Dick Balaska on December 15, 2006, 5:05 pm
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Hi ho,
One thing i don't get, is why Interest Earned and Dividends increase my cost
basis. -- (This is just on the pretty graphs and don't really affect
transactions.)
So, if i buy 100 shares of XXX.O for $1000, my cost basis is $1000.
Next month i get a dividend of $10 and my cost basis goes up to $1010.
But, but, but, those shares didn't cost me $1010. My cost basis is still $1000,
or if anything, my cost basis is $990 (because i made that $10 back).
I've been stumped by this for years.
Can anyone esplain the logic behind this?
Danke
_,--"
`-._ ________-_______ "----
_----'--'--------------------------------'--'----_
//_| | Dick Balaska / | | _\
(_____|_|__= Guilford Conn USA =__|_|_____)
______=___ http://www.buckosoft.com/ ___=_____/_
/-(o)-~~-(o)-~~-(o)-`------'-(o)-~~-(o)-~~-(o)-/
Welcome to Connecticut; road legally closed.
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Posted by Fred Smith on December 15, 2006, 6:38 pm
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Certainly.
Your cost basis is the amount you've paid tax on. When you initially buy a stock
for $1000, you pay with after-tax dollars. To ensure you don't get taxed twice,
you are deduct your cost base from the proceeds of a sale in determining your
taxable income.
When you reinvest a $10 dividend, you pay tax on the dividend, even though you
don't get any cash. Your cost base increases, because you've now paid tax on
$1010 of your investment. Without this adjustment, you would be taxed twice on
the dividend -- once when it's reinvested, and again when you sell.
--
Regards,
Fred
> Hi ho,
>
> One thing i don't get, is why Interest Earned and Dividends increase my cost
> basis. -- (This is just on the pretty graphs and don't really affect
> transactions.)
>
> So, if i buy 100 shares of XXX.O for $1000, my cost basis is $1000.
> Next month i get a dividend of $10 and my cost basis goes up to $1010.
> But, but, but, those shares didn't cost me $1010. My cost basis is still
> $1000,
> or if anything, my cost basis is $990 (because i made that $10 back).
>
> I've been stumped by this for years.
> Can anyone esplain the logic behind this?
>
> Danke
>
> _,--"
> `-._ ________-_______ "----
> _----'--'--------------------------------'--'----_
> //_| | Dick Balaska / | | _\
> (_____|_|__= Guilford Conn USA =__|_|_____)
> ______=___ http://www.buckosoft.com/ ___=_____/_
> /-(o)-~~-(o)-~~-(o)-`------'-(o)-~~-(o)-~~-(o)-/
> Welcome to Connecticut; road legally closed.
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Posted by MyVeryOwnSelf on December 15, 2006, 6:39 pm
Please log in for more thread options > One thing i don't get, is why Interest Earned and Dividends increase
> my cost basis. -- (This is just on the pretty graphs and don't really
> affect transactions.)
>
> So, if i buy 100 shares of XXX.O for $1000, my cost basis is $1000.
> Next month i get a dividend of $10 and my cost basis goes up to $1010.
> But, but, but, those shares didn't cost me $1010. My cost basis is
> still $1000, or if anything, my cost basis is $990 (because i made
> that $10 back).
>
> I've been stumped by this for years.
> Can anyone esplain the logic behind this?
Maybe you're thinking about dividend reinvestment. Typically, mutual funds
allow you to choose dividend reinvestment. Some common stocks offer it too.
Each time you reinvest dividends, there are actually two transactions
happening:
1. You receive a dividend of (say) $10. The dividend is subject to income
tax (unless it's, like, a muni bond mutual fund).
2. You invest the $10 in the same security and get extra shares. You now
have 100-plus-extra shares. The 100 shares still have $1000 basis. The
extra shares have $10 basis.
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Posted by Andrew on December 15, 2006, 7:23 pm
Please log in for more thread options MyVeryOwnSelf wrote:
>> One thing i don't get, is why Interest Earned and Dividends increase
>> my cost basis. -- (This is just on the pretty graphs and don't
>> really affect transactions.)
>>
>> So, if i buy 100 shares of XXX.O for $1000, my cost basis is $1000.
>> Next month i get a dividend of $10 and my cost basis goes up to
>> $1010. But, but, but, those shares didn't cost me $1010. My cost
>> basis is still $1000, or if anything, my cost basis is $990 (because
>> i made that $10 back).
>>
>> I've been stumped by this for years.
>> Can anyone esplain the logic behind this?
>
> Maybe you're thinking about dividend reinvestment. Typically, mutual
> funds allow you to choose dividend reinvestment. Some common stocks
> offer it too.
>
> Each time you reinvest dividends, there are actually two transactions
> happening:
>
> 1. You receive a dividend of (say) $10. The dividend is subject to
> income tax (unless it's, like, a muni bond mutual fund).
>
> 2. You invest the $10 in the same security and get extra shares. You
> now have 100-plus-extra shares. The 100 shares still have $1000
> basis. The extra shares have $10 basis.
Wait a second - The OP never said anything about reinvestments of the
dividend. He simply said he received a dividend. In his scenario, there is
no cost basis increase. He is taxed of course on the dividend, but the
original number of shares stays the same with the original cost basis.
--
-------------------------------------------------------------
Regards -
- Andrew
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Posted by DP on December 15, 2006, 9:23 pm
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As Andrew noted, you didn't mention anything about dividend reinvestment to
buy new shares. But that's what it sounds like you're talking about. Are
you?
> Hi ho,
>
> One thing i don't get, is why Interest Earned and Dividends increase my
> cost
> basis. -- (This is just on the pretty graphs and don't really affect
> transactions.)
>
> So, if i buy 100 shares of XXX.O for $1000, my cost basis is $1000.
> Next month i get a dividend of $10 and my cost basis goes up to $1010.
> But, but, but, those shares didn't cost me $1010. My cost basis is still
> $1000,
> or if anything, my cost basis is $990 (because i made that $10 back).
>
> I've been stumped by this for years.
> Can anyone esplain the logic behind this?
>
> Danke
>
> _,--"
> `-._ ________-_______ "----
> _----'--'--------------------------------'--'----_
> //_| | Dick Balaska / | | _\
> (_____|_|__= Guilford Conn USA =__|_|_____)
> ______=___ http://www.buckosoft.com/ ___=_____/_
> /-(o)-~~-(o)-~~-(o)-`------'-(o)-~~-(o)-~~-(o)-/
> Welcome to Connecticut; road legally closed.
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