Acquiring Stock Through a DRIP

Special rules determine your basis and holding period for stock bought through a dividend reinvestment plan.

When you receive a dividend on a stock investment, you may wish to keep that amount invested in the same company. Over time, this approach allows you to compound your returns from that stock. A dividend reinvestment plan (DRIP) provides a way to have cash dividends automatically invested in additional shares.


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At one time the opportunity to have dividends automatically reinvested was available only if you invested in a company that offered such a plan. If you wanted dividend reinvestment for more than one stock, you had to invest in a different plan for each stock. You can still invest in plans for individual companies, but many brokerage firms now offer a DRIP, making it possible to adopt this method for many different stocks held in the same account, including stock of companies that don’t offer their own DRIP.

Note. These plans differ from one company to the next and one broker to the next. Be sure to read the details before signing up.

Two important points

Here are a couple of points to be clear about when investing through a DRIP.

These are cash dividends. Sometimes companies pay dividends in stock. When a company pays a stock dividend, all shareholders receive stock, whether they hold shares in a DRIP or not. Investing in a DRIP does not mean you’re receiving stock dividends. It just means your dividends are being used to buy additional shares of stock.

You’re the owner. As a formal matter, a DRIP may hold your shares in a trust, but if so, the trust is disregarded for tax purposes. You’re the owner of the shares and pay tax on the dividends.

Dealing with fractional shares

The dividend amount will rarely be an exact multiple of the price at which new shares can be purchased. This means your reinvestment is likely to include a fractional share. Over a period of time you may accumulate a number of fractional shares bought at different prices. Prior to 2012, recordkeeping for all these purchases could be quite difficult.

Beginning that year, DRIP investments are subject to rules similar to the ones that apply to mutual fund shares. Most importantly, this means the average basis method can apply to these shares. And even if you don’t use the average basis method, the broker or other reporting entity will be required to track your basis and holding period for newer shares, so your recordkeeping burden for these shares will be greatly reduced.

Older shares. The requirement for the broker to report basis applies only to covered shares, which for DRIPs generally means shares acquired after 2011, so if your DRIP investments go back farther than that, determining basis on the older shares will be your responsibility. You should also be aware that if you use averaging, the basis of noncovered shares won’t be averaged together with the basis of covered shares.


Some companies encourage participation in their dividend reinvestment plans by offering a small discount on shares purchase through the plan. The discount is treated as an additional dividend and included in your basis for the stock.

Example: You receive a $95 dividend from a company that provides a 5% discount for shares purchased through its DRIP. At this discount, the dividend will buy $100 worth of stock, so you’re taxed on a total dividend of $100 and your basis for these shares is also $100.

You may also receive additional dividend (and basis) if the company pays brokerage commissions on behalf of DRIP investors.

Service charges

If you participate in a DRIP that imposes a service charge, this charge is not included in the basis of shares you buy through the plan. Instead, it is an investment expense. Investment expense deductions were previously allowed as miscellaneous deductions. These deductions have been eliminated, so DRIP service charges are no longer deductible.

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