Tax hassles with dividend reinvestment plans?

Dividend Reinvestment Plans (DRPs) are a popular option for investors looking to automatically reinvest their dividends into additional shares of the stock or fund, such as VDHG, without incurring brokerage fees. This can be a powerful tool for compounding your investment over time. However, it’s true that DRPs can complicate your tax situation, primarily because each reinvestment is considered a separate purchase for tax purposes.

Why DRPs Can Cause Tax Headaches

1. Multiple Cost Bases: Each time dividends are reinvested, you acquire more shares at a different price. This means you have multiple purchase prices (cost bases), which you need to track over the life of your investment. When you eventually sell your shares, you’ll need to calculate the capital gain or loss for each parcel of shares, which can be cumbersome if you’ve been reinvesting dividends over many years.

2. Record Keeping: As you’ve mentioned, you will need to keep track of every dividend reinvestment transaction. This includes the date of reinvestment, the number of shares purchased, and the price at which the shares were acquired. This information is crucial for accurately calculating capital gains tax when you decide to sell your shares.

Strategies to Minimize Tax Paperwork for DRPs

1. Detailed Record Keeping: Maintain a meticulous record of all your transactions. This can be done manually, but using a spreadsheet or investment tracking software can simplify the process. Ensure you save all statements and transaction notices from your investment platform or fund.

2. Use of Technology: Consider using financial software or apps that can track your investments and automatically record dividend reinvestments. Some platforms might offer tools that integrate with tax software, which can help streamline the process when you prepare your tax returns.

3. Regular Review

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The easiest way (by far) of using a DRP and then avoiding complications down the track in terms of paperwork when selling is by using a portfolio tracking tool like Sharesight or Navexa.

You need to keep or keep track of every purchase which includes the dividend reinvestments for when you sell. This includes the brokerage you pay on each purchase. So the DRPs probably have no brokerage, but each pearler purchase does. When you come to sell there is one sale price and another brokerage, but to calculate the capital gain you need to add the price you paid for each little parcel you acquired and the brokerage for each. These are your «cost base». This is where sharesight or navexa probably come into their own. (I have a spreadsheet going back to the 90s when I bought my first shares).