Taxes On Reinvested Dividends?

Recently one of our members found out that one of his coworkers believed that he did not have to pay taxes on dividends that were reinvested in a dividend reinvestment program (drip). His reasoning was that since he did not actually received the dividend (only the drp shares of stock), he was not taxed on them. Well, we are sorry to disappoint, but unless those dividends are in a tax advantaged account, Uncle Sam is indeed entitled to his cut. There are actually two transactions that occur with drip reinvested dividends. First you are paid a dividend, then second that dividend is used to buy shares in the company usually at the market closing price on the day that the dividend is paid. Every once in a while though, a company may pay a tax-free stock dividend, such as when a company decides to distribute to its shareholders, stock from the company portfolio of another company. Also, think when the next time someone figures that a certain stock did a certain percentage gain with reinvested dividends, and make sure to find out whether or not they're taking taxes into account.