If dividends are reinvested, what happens to the taxpayer's cost basis?

If dividends are reinvested, what happens to the taxpayer's cost basis?

• A. A) Basis decreases by the amount of dividends reinvested.
• B. B) Basis is stable and does not change.
• C. C) Basis increases by the amount of dividends reinvested.
• D. D) Basis is only adjusted when the shares are sold.

Answer: (C)

When dividends are reinvested, the taxpayer's cost basis in the investment increases by the amount of the reinvested dividends. This is because the reinvested dividends are used to purchase additional shares or fractions of shares in the same investment, which adds to the total investment cost. By increasing the cost basis, the taxpayer effectively acknowledges that they have contributed more capital to the investment through the reinvestment of those dividends. This adjustment is important because it can affect capital gains and the overall tax liability when the shares are eventually sold. A higher basis can reduce the amount of taxable gain recognized upon sale, which can be beneficial for tax planning purposes.

When dividends are reinvested, the taxpayer's cost basis in the investment increases by the amount of the reinvested dividends. This is because the reinvested dividends are used to purchase additional shares or fractions of shares in the same investment, which adds to the total investment cost. By increasing the cost basis, the taxpayer effectively acknowledges that they have contributed more capital to the investment through the reinvestment of those dividends. This adjustment is important because it can affect capital gains and the overall tax liability when the shares are eventually sold. A higher basis can reduce the amount of taxable gain recognized upon sale, which can be beneficial for tax planning purposes.