I'm still confused.
I bought 250 shares of Exxon in Oct 2001. Reinvested all
dividends and paid tax on them. I just sold the original
250 shares earlier this year (2007), and realize I have to
pay tax on the cap gain. I have always thought that the cap
gain is based on the basis (original purchase cost,
including commission) and the selling price (net, taking the
commission into account).
Question 1: Is this correct?
That sounds right for the original 250 shares if that is all
you sold and you didn't sell any of the reinvested
dividends. Stocks you sell are on a first in, first out
basis unless you specify otherwise.
Since you sold in 2007, this will be reported on you 2007
taxes, next year, not 2006 taxes.
Question 2:
Now I have umpteen lots of Exxon shares (each just a
fraction over 1 share). What is the cost basis here? How
can I calculate into the basis the taxes I already paid on
these shares? Or can I not do that?
Each time the stock produced a dividend a certain number of
shares (and fraction of share) were purchased. Your basis
on _those_ particular shares for that particular date is
what you paid for them, i.e., the amount of that dividend.
The cost basis for _each_ reinvestment can be different and
when sold could result in a gain or loss for those
particular shares, therefore each reinvestment must be
accounted for separately.
Also, when you sell those shares, any that were purchased
within the last year have to be treated as short term
capital gain. Also, if you only sell _some_ of those
shares, the first in, first out rule applies so you have to
report gains or losses on the oldest shares. It gets
complicated when there are a lot of reinvested dividends.
I use Quicken to do all of the accounting for me. If each
transaction, dividend payment, share price at time of
dividend is entered into Quicken, then when stock is sold a
report can be generated that shows the cost basis for each
reinvestment that can be used to fill out the 1040 sched. D.
It makes it much easier. I keep track of 20-40 (varies)
stocks this way, some of which I have been reinvesting
dividends since 1970.
The tax you pay on dividends has no affect on your basis, it
does not affect the basis anymore than if you took money out
of your pocket to purchase the stock. The source of the
funds to purchase and whether or not that source has been
taxed makes no difference.