What are the tax consequences of reinvesting my dividends, if any?
Again, the answer really depends on what dividends you are really reinvesting. When you say “reinvestment,” most people immediately think of mutual funds. So let’s look at those first. If you reinvest your dividends within a mutual fund, you are really buying more shares of stock, at different times, and at different prices. You are simply eliminating the middle man: Instead of the mutual fund company sending you a dividend check, and then you sending the mutual fund company that same check to purchase more shares, the mutual fund company just purchases the new shares directly. But make no mistake — these are brand spankin’ new shares that you have purchased. You still need to pay tax on the dividends paid to you, and you also need to update your tax basis in your mutual fund in order to account for these additional purchases of shares. If you’re not updating your mutual fund cost basis for dividends you receive and have reinvested back into a mutual fund in the form of additional sha
