Capital Gains question

[bayskater]

Hi,
Back in 1980 I bought some AT&T stock. At divestiture, I picked up shares in
the other Companies, Bellsouth, Ameritech, etc.. I kept all the shares and
enrolled in the Dividend Reinvestment Plans of all of them. I've kept pretty
good records of all the spin-offs, stock splits., etc..

I now want to sell all of my AT&T shares, which is quite a lot, since the
recent activities due to Bellsouth and SBC's acquisition.

In trying to come up with my "Cost Basis" for the sale, I have added up all
of my costs for the incremental reinvested dividends and have come up with a
total cost of all of them, which I think will be my "cost" which will be
compared with my selling price for the lot and become my taxable capital
gain.

My wife says that each year since we started we have paid taxes on the
income from those reinvested dividends, so the taxes we paid need to be
included in our cost basis for computing capital gains on the sale of the
stock.

My question is - Do the taxes that we have already paid on the re-invested
dividends have anything to do with our capital gains computations?

Thanks for your help.

Fred

[cpt banjo]

No, you can't include the taxes you paid on the dividends in the basis
for the shares purchased with the dividend proceeds.

Look at it this way: suppose you took $5,000 of your wage income (on
which you paid income and payroll taxes of, say, $1,000) and you
bought $5,000 worth of stock. Your cost basis in the stock is the
$5,000 you paid, not $6,000. If the rule were otherwise, you could
sell the stock immediately after you bought it and generate a $1,000
"loss". In effect, you'd be getting a deduction for a portion of the
income tax you paid on your wages, which isn't allowed.

[bayskater]

Thanks, Captain,
That makes sense. Now for a diplomatic way to tell my wife.

Fred
"cpt banjo" <cptb...@aol.com> wrote in message
news:1183065324.0...@k79g2000hse.googlegroups.com...

[Ernie Klein]

In article <U8adnVXFksfivRnb...@comcast.com>,
"bayskater" <efhu...@nospamcomcast.net> wrote:

> Hi,
> Back in 1980 I bought some AT&T stock. At divestiture, I picked up shares in
> the other Companies, Bellsouth, Ameritech, etc.. I kept all the shares and
> enrolled in the Dividend Reinvestment Plans of all of them. I've kept pretty
> good records of all the spin-offs, stock splits., etc..
>
> I now want to sell all of my AT&T shares, which is quite a lot, since the
> recent activities due to Bellsouth and SBC's acquisition.
>
> In trying to come up with my "Cost Basis" for the sale, I have added up all
> of my costs for the incremental reinvested dividends and have come up with a
> total cost of all of them, which I think will be my "cost" which will be
> compared with my selling price for the lot and become my taxable capital
> gain.

I am not sure what you mean by "adding up all the costs". You don't
arrive at cost basis by adding the costs together. I think you can
average reinvestments for mutual funds but I don't think that is allowed
for stocks. Cost basis for any stock purchase whether it is from
reinvested dividends or not, is determined by the purchase price for
those shares/partial shares. For example if on 5/1/06 you had $400 of
dividends and the stock price was $26.26/share, you would have received
15.291 shares.

After you sell all of your ATT shares and are filling out your 1040
sched D (cap gains) you would list a sale of 15.291 shares of ATT
purchased on 5/1/06 with a cost basis of $26.26/share. You make a
separate entry for each reinvested dividend (4 per year). I had to do
that for some ATT stock I sold that I had purchased in 1962 -- that had
45 years of reinvestments!!! -- it took pages and was a lot of work but
thank God for Quicken and Turbotax.

>
> My wife says that each year since we started we have paid taxes on the
> income from those reinvested dividends, so the taxes we paid need to be
> included in our cost basis for computing capital gains on the sale of the
> stock.
>
> My question is - Do the taxes that we have already paid on the re-invested
> dividends have anything to do with our capital gains computations?

No. Income tax is just that, tax on your INCOME from the dividends. It
doesn't matter what you do with the dividends -- take them in cash or
reinvest them, they are taxable either way. The price you pay for stock
that the reinvested dividend purchases is your cost basis for those
shares (or part shares) -- period -- it is the same as if you had taken
the money out of your pocket to purchase them. The only thing that you
can add to the cost basis are transaction fees if any, but reinvested
AT&T stock has no transaction fees.

Tax on income NEVER affects cost basis.

Don't forget to add any commissions or transaction fees to the cost
basis of the original purchase of the ATT shares that you purchased in
1980 though if you purchases through a broker, however. That does
affect the cost basis and will reduce the amount of cap gains tax.

--
-Ernie-

[Sam]

bayskater writes:

> In trying to come up with my "Cost Basis" for the sale, I have added up all
> of my costs for the incremental reinvested dividends and have come up with a
> total cost of all of them, which I think will be my "cost" which will be
> compared with my selling price for the lot and become my taxable capital
> gain.
>
> My wife says that each year since we started we have paid taxes on the
> income from those reinvested dividends, so the taxes we paid need to be
> included in our cost basis for computing capital gains on the sale of the
> stock.
>
> My question is - Do the taxes that we have already paid on the re-invested
> dividends have anything to do with our capital gains computations?

No. But each time you reinvested your dividends, that's essentially a
purchase of stock at the-then market price. The cost basis for the shares
that you got through dividend reinvestment is how much you paid for them.

You reinvested $100 worth of dividends, and got ten shares at ten bucks
each. When you sell these shares now, your cost basis in these ten shares is
$100 bucks, completely independent of the cost basis in any other shares
you have. If those shares split, since then, everything that was split from
those shares, collectively, has the same $100 cost basis to it.

If there was some other corporate action -- merger, or acquisition -- you
should have some paperwork that tells you how that corporate action is to be
treated, for tax purposes.

[Paul Maffia]

No, the taxes paid were paid to Uncle, not to someone from whom you bought
the stock
"bayskater" <efhu...@nospamcomcast.net> wrote in message
news:U8adnVXFksfivRnb...@comcast.com...

[Paul Maffia]

If he is selling all his stock, adding all his individual costs is the way
to arrive at his cost basis.
"Ernie Klein" <eck...@pacbell.net> wrote in message
news:ecklein-ECB830...@news.newsguy.com...

[bayskater]

"Paul Maffia" <pma...@centurytel.net> wrote in message
news:RYWdnd-JK8lx1Rnb...@centurytel.net...

>Tahnks for your replies, Ernie & Paul (Sam's was blank).

I AM selling ALL of AT&T so it does make it a little bit easier.

Fred