Will my broker calculate my cost basis for DRP stocks?

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Posted on November 30th, 2011

If you think you don’t need to track cost basis on your own because brokers must now report to both you and the IRS the cost basis for any stock sold, there are some potential pitfalls to be aware of.

First, new cost basis reporting requirements are being phased in. New regulations requiring brokers to report cost basis generally apply only to stocks bought after January 1, 2011. (Mutual funds will become subject to the same provisions in 2012; bonds and options will follow in 2013.) However, for a stock bought as part of a dividend reinvestment plan, or DRP, the new provisions will apply only to purchases made on or after January 1, 2012. As a result, for most DRP stock purchased before that date, in most cases you or your tax preparer will still be responsible for calculating accurate cost basis information.*

Because DRPs typically involve many purchases over a long time, calculating the cost basis for a DRP stock could be challenging. Fortunately, there’s also a provision that makes the calculation easier. For stocks held in DRPs, the cost basis of all purchases in the plan can be averaged to determine the cost basis for individual shares sold.

The ability to average sales from a DRP applies only to plans whose documents specify that at least 10% of every dividend paid must be reinvested in identical stock. To be considered identical, the stock must have the same CUSIP number, which would not apply to purchases of the same stock made outside the DRP.

Even after adjusted cost basis reporting is available for DRP stocks, you can still specify which shares are considered the ones sold for tax purposes. However, you must do so before the trade settles–typically, three days after the transaction.

You can include any transaction costs paid as part of your adjusted cost basis. And even though your adjusted cost basis may be calculated by someone else, it may still be a good idea to keep documentation of any purchases or sales to make sure it matches the information being supplied to the IRS.

*Note: The reporting regulations already apply for DRPs that do not require reinvestment of at least 10% of every dividend paid.

Source: Broadridge