I get a lot of questions every tax year about capital gains taxes and what the word “basis” means. The basis of an asset is the purchase price paid. One thing that is easy to miss is the tax paid on a yearly basis on the dividends received that have been reinvested in the investment account. These dividends are added to the basis of the investment thus increasing the basis. When the investment is eventually sold, income tax is paid on the difference between the adjusted sales price and adjusted basis.
Keep record of what you pay for investments. Have the price you bought shares at and the date bought which gives you a starting point from which to add reinvested dividends. This is your tax basis and if you don’t include the reinvested dividends, you will be paying tax twice on the dividend received. Please note this does not apply on a yearly basis to IRA’s and other tax deferred accounts.
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About Stu: With more than 29 years of experience as a tax professional, Stu Steinberg brings a broad depth of knowledge to his work with his clients. Stu founded Erock Tax to help provide tax and financial planning strategies to individuals, families and small businesses and is passionate about empowering his clients through education about their money health. Stu is highly energetic and brings a sense of optimism, creative problem-solving and a deep level of commitment to every Erock client.