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Posted by Herb Smith on June 13, 2006, 10:48 pm
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Han wrote:
> I don't know about the OP, but I have to pay taxes on the
> cap gains and dividends for the tax year in which they are
> distributed. What can you do about those taxes?
Pay them, just like other nonpayroll income.
> Are they to be added to the basis?
If the capital gains distributions and dividends are reinvested (used
to buy additional shares), the amount is added to basis. Don't forget
to increase your share total by the appropriate amount.
> Somehow it seems that double taxation creeps in.
No, there is no double taxation in this. There might be if
you forget to add the amount of reinvestment to your cost
basis, however.
> Let's say:
> Cap gains/dividends reinvested in 2003 were $1000
> Taxes paid on that: $150
> This portion of stock sold in 2005 for $1500
> Straight cap gains on this is $500, but there was already
> $150 tax paid.
> Is the "net" cap gains now $350, or not?
No, the capital gain is $500. The tax you paid on the $1000
of reinvested dividends and capital gain distributions was
ordinary income tax on that income, but has nothing to do
with any subsequent capital gain on sale.
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